Assessment and recommendations

The economy is undergoing a prolonged recession since the outbreak of the global crisis in late 2008. The bust of the housing boom and persistent domestic structural weaknesses, especially in the labour market, have been compounded by the European debt crisis. Deleveraging in the private sector has resulted in a contraction of domestic demand, adding to mass unemployment and generating high government deficits (). The feedback loops between confidence in government solvency and banking sector health, which reflect in part the absence of appropriate euro area institutions (OECD 2011a, 2011b), have resulted in high risk spreads on interest rates for government debt (). This in turn has raised funding costs for banks and has kept lending conditions tight.

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