Cutting back on the overdeveloped public investment side and increasing expenditures on the under-developed social safety net could help preserve needed confidence, and help increase labour mobility. And with old industries still plagued by over-investment, expansion in other areas must be encouraged through deregulation and related public policies. As for continental Europe, the primary challenge is structural reform. Major macro-economic imbalances of the sort that increasingly confront the US and Japan are neither evident nor in prospect. Current account imbalances for the region as a whole do not pose a problem.
Equities still constitute only a small proportion of house-hold wealth.
Fiscal restraint might also be recommended in some smaller European economies already pushing the limits of potential, but in most countries policies of restraint have already been in place for some time. But all of these macro-economic prescriptions for holding a steady course presume that the current European expansion will continue uninterrupted by dramatic events elsewhere. Over the last few years, exchange rate movements among major currencies have generally provided support for cyclical stabilization. Recently however the strength of the yen and the persistent weakness of the euro have been less consistent with domestic objectives raising the question of what might be done about it, aside from policy rates. The current answer appears to be, not much.