Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.
The Great Recession has destroyed the possibility of consuming and investing on cheap and easily available credit without regard to quality. Households in major industrial countries will have to borrow less and save more than they did before the crisis. At the moment, interest rates are extremely low while central banks try to offset the withdrawal of credit from financial institutions, but when rates return to normal levels the new reality of expensive credit will register fully.