The recognition of losses was postponed and, as a consequence, capital continued to be allocated to investments with limited positive impact on Japan’s long-term growth potential, which some have called “zombie lending”4. Ultimately, this resulted in Japan’s “lost decade”, namely an extended period of anaemic growth (see Chart 3). A second lesson is that institutional and structural reforms are essential Early in the crisis, emerging Asian economies strengthened prudential regulation and supervision, together with bank governance and market transparency and discipline, in order to prevent further instability and bring domestic standards closer to the international norms.5 Furthermore, they generally acknowledged that their economic “miracle” before the crisis was not sustainable. It was driven by over-investment encouraged by Colbertist policies, implicit government guarantees, and too often, opaqueness and political interference in market mechanisms.6 As a result, at the macro level, growth was led by capital accumulation in the wrong sectors and not by a rise in total factor productivity. In Paul Krugman’s words, the Asian miracle was “the fruit of perspiration, not of inspiration”7. To address the root causes of the crisis, structural reforms aimed at improving governance and challenging vested interests, both in public policy-making and in the corporate sector,  2  See FRBSF Economic Letter (2011). “Could We Have Learned from the Asian Financial Crisis of 1997–98?”, February 2011. 3  See Lindgren, C.-J. et al. (1999). “Financial Sector Crisis and Restructuring. Lessons from Asia”, IMF Occasional Paper, 188. 4  See Fukao, M. (2003).

In my view, there are similarities that yield useful policy lessons for the euro area. But there are also differences that need to be kept in mind. What can we learn from the Asian crisis? What are the parallels between the Asian crisis in 1997–1998 and the euro area crisis? The economies of emerging Asia were characterised by buoyant growth and a brisk expansion of credit (see Chart 1). This rise in debt was facilitated by considerable inflows of foreign capital, which financed significant external deficits (see Chart 2). This led to growing financial imbalances, and in particular to currency and maturity mismatches on the balance sheets of local banks. In addition, the economic boom prevailing at that time was accompanied by a loss of competitiveness of the region’s export sector. Investors typically under-priced potential risks as they had overly optimistic expectations of the medium-term growth prospects. They did not identify systemic vulnerabilities such as the risk of sudden stops in capital flows or of twin crises of the banking system and the balance of payments, which eventually materialised.1 Except for currency mismatches, similar developments were evident in the euro area before 2009 – if not at the regional level, at least in those countries that later ran into financial difficulties. It was widely believed that sudden stops in capital flows, not to mention twin  1  See Calvo, G. (1998). “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops”, Journal of Applied Economics 1(1), pp.