But in the face of such a shock they were always going to face that adjustment, one way or another. What don’t we know? The main thing we don’t know is how long the boom will last. This matters a great deal. If the rise in income is only temporary, then we should not respond to it with a big rise in national consumption.
The elevated debt positions that governments, companies and households have accumulated also constitute a major potential vulnerability. Corporate and government debt ratios in the euro area are currently 75 and 92 percent respectively. Government debt in particular saw rapid growth during the pandemic. In a low-interest environment, this additional debt would be easy to deal with.