The economic recovery in the euro area has been nothing but fragile. Economic catastrophe struck the region in 2008, as the world stumbled through recession and the systemic financial stress that accumulated during this period came to a head in 2011, culminating in various sovereign debt crises that brought several major economies in the European Union to a screeching halt. After a brief period of positive aggregate economic growth, euro area GDP growth turned negative in 2011 and only began recovering in the second half of 2013.
But on Tuesday, the European Central Bank — which has been tasked with managing much of the tenuous recovery — had some good news to report. Financial conditions remain fragile, but overall systemic stress has moderated over the past few months. Indicators of default risk are now at their pre-2011 levels, and a composite indicator measuring systemic financial market risk has fallen to pre-crisis levels.
“This resilience partly reflects the improvement of euro area fundamentals since the height of the euro area crisis in 2011,” the ECB said in its latest financial stability review. “Fiscal consolidation and structural reforms have continued in the euro area, though at an uneven pace across countries. At the same time, higher capital and liquidity buffers are being built up in the banking sector, strengthening shock-absorption capacity, which should improve bank performance over time. Complementing national policy measures, tangible progress has been made towards building a banking union.”