The October issue of the Quarterly Report focuses on the process of corporate balance sheet adjustment in the euro area, and on its implications for the economic recovery in the medium term. Based on an analysis of previous instances of such rebalancing processes, it finds that these tend to be associated with lasting adverse macroeconomic consequences such as low output growth. From a policy perspective this suggests that the adjustment of corporate balance sheets currently underway in the euro are should ideally be accompanied by measures to strengthen the banking sector and to front-load growth-enhancing economic reforms.

The report also presents a review of previous current account rebalancing processes, which have tended to be followed by low growth and rising unemployment. A further chapter on Greece shows that a high proportion of Greek companies are involved in export activity, which bodes well for an export-led adjustment. Finally, the Quarterly Report reveals that the degree of house price overvaluation in the euro area has fallen significantly since the beginning of the global economic and financial crisis.

>> Press release 5/10/2010. IP10/1286. Corporate balance sheet adjustment shapes euro-area economic outlook