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The Challenge of Economic Rebalancing in Europe

The Challenge of Economic Rebalancing in Europe

Perspectives for CESEE Countries

Edited by Ewald Nowotny, Doris Ritzberger-Grünwald and Helene Schuberth

In the long aftermath of the acute global financial crisis of 2008/09, “rebalancing” the economy with new sources of growth and productivity remains a persistent necessity. This book addresses the resulting trade-offs and challenges. These needs, and the corresponding policy challenges, are especially prevalent in Europe, in particular Central, Eastern and South-Eastern Europe. On this issue, this book contributes lessons learned from earlier balance sheet recessions. It also addresses the often overlooked link between macroeconomic imbalances and economic inequality. Further contributions focus on the interaction between monetary policy and financial stability, adding a regional perspective to these important issues.

Chapter 5: Fighting balance sheet recessions: a Japanese lesson for the euro zone

Richard C. Koo

Subjects: economics and finance, financial economics and regulation, international economics, money and banking


After the years of economic stagnation since 2008 and an alarming fall in inflation rates, some European policy-makers are beginning to pay attention to Japan’s experience of a ‘lost decade’. This is in sharp contrast to the Obama administration in the United States (US), which recognized within the first two years of the global financial crisis that the US was suffering from the same kind of balance sheet recession that had plagued Japan and managed to steer clear of its dangers by fully utilizing lessons learned from Japan. This chapter argues that once the European predicament is understood to be a case of balance sheet recession, it will become clear that the crisis can be resolved with two modifications to the structure of the euro without resorting to an injection of German taxpayer money or additional monetary easing by the European Central Bank (ECB), including quantitative easing.

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