From a longer term perspective, the process of globalization and the adverse demographic trends have challenged the sustainability of the economic and social systems of the EU. In spite of these problems, I remain firmly convinced that Europe will continue to be a dynamic and prosperous region in the future. The short term costs of structural reforms will be far outweighed by their targeted long-term gains. A more competitive and integrated Europe, underpinned by stronger institutions and governed by more sustainable economic and financial policies, will benefit the whole global economy. The remaining part of my speech will address these points in more detail. Europe through the crisis Europe has been one of the worst hit regions from the global crisis. The initial impact of the subprime market crash in the US was felt across the European financial sector, with stock markets plummeting and banks facing huge losses on their balance sheets. The resulting decrease in asset prices and the drying up of bank credit, the decline in global trade activity as well as the collapse of business and consumer confidence, were immediately reflected in a widespread recession during the 2008–2009 period, followed by a period of uncertain and slow growth. Unemployment shot upwards while fiscal balances deteriorated rapidly. The decline of the economic activity fed into further uncertainty in the financial sector, originating a negative feed-back loop which became difficult to overcome in the presence of private sector deleverage, widespread risk aversion and public finance constraints.

BIS central bankers’ speeches  1  Most of the aforementioned features were shared with other economies, such as US and Japan. The balance sheet recession they describe remains tractable, at least in theory, with a combination of short term economic stimulus, long term commitment to macroeconomic stability, structural reforms, and patience. However, there have been several idiosyncratic issues which set the European experience apart from the other economies. They were manifested into severe public sector problems in several Eurozone countries, widespread lack of trust in institutions and authorities, and the strengthening of centrifugal forces which risked breaking the euro apart. What were the factors that exacerbated the crisis in the Eurozone? While an exhaustive list would be long, I would like to highlight three of them. -  First, the inter-dependence between sovereign credit rating, financial sector risk premia and the real economy was exacerbated by incomplete financial market integration. While the region as a whole suffered from capital outflows, financial integration within EU went in reverse during the past four years. The repatriation of cross-border financial flows created further problems in the Eurozone economies and neighboring region. In fact, the subsequent cross-border deleveraging and derisking has been one of the main crisis propagation channels that has affected eastern European countries, Albania included. -  Second, the divergence in intra-regional economic policies resulted in a divergence of competitiveness within the EU and Eurozone. This accentuated existing intraregional balance of payments issues during the crisis, highlighting the need for long overdue economic and fiscal reforms.