In one direction lies the Japanese experience, and in the other direction that of emerging East Asia. The authorities can either choose between swiftly auditing and repairing the banking sector, which will help to restore credit flows, or they can allow forbearance, which will harm the long-term prospects for our economy. I do not mean to downplay the significant restructuring and recapitalisation that has already taken place in Europe. Since the onset of the global financial crisis, euro area banks have raised around € billion of fresh capital and a further € billion has been injected by governments, equivalent in total to more than 5% of euro area GDP. Today, the median Core Tier 1 capital ratio of the largest euro area banks stands close to 12%. But there is some way to go. To ensure that we take the right road, I see three responses as key. The first is to carry out a comprehensive clean-up of the banking system so that the price mechanism is no longer obscured by uncertainty about asset valuation and bank funding models, and banks can free up balance sheet capacity to extend new loans. The ECB will take up its supervisory responsibilities in about a year from now, and as part of this we will conduct a comprehensive assessment of 128 significant credit institutions covering 85% of euro area bank assets.
Open trade policies in the crisis helped Asian economies to benefit from the upswing in global trade and growth towards the turn of the millennium (see Chart 4), which in turn supported the post-crisis recovery. However, while there may be lessons to learn, what are the important differences between emerging Asia of the 1990s and the euro area today? Emerging Asian economies had greater policy leeway than euro area countries in dealing with their crises, in that they had flexible exchange rate regimes. Some might argue that this makes it hard to say which part of the Asian experience is relevant for Europe. But I would have a different interpretation: a lack of nominal exchange rate flexibility does not preclude real exchange rate adjustment. Sharing a currency entails a fundamental trade-off. It brings considerable microeconomic benefits but it creates responsibilities for participating countries. They should run prudent policies to make asymmetric shocks less frequent, ensure that relative prices can adjust if such a shock nevertheless occurs, and be prepared to insure each other against extreme outcomes when the former mechanisms are not enough. The conditions were unfortunately not met in the euro area. National policies were run on the misguided assumption that countries, companies and households could borrow forever.