the euro area z - scores https : / / www. ecb. europa. eu / press / key / date / 2021 / html / ecb. sp210128 ~ 8f5dc86601. en. html 1 / 13 29 / 01 / 2021 the sovereign - bank - corporate nexus – virtuous or vicious? sources : eurostat and ecb calculations. notes : the composite measure is based on a broad set of indicators along five dimensions : debt service capacity ( measured by the interest coverage ratio, corporate savings and revenue generation ) ; leverage / indebtedness ( debt - toequity, net debt - to - ebit and gross debt - to - income ratios ) ; financing / rollover ( ratio of short - term debt to long - term debt ; quick ratio ( defined as current financial assets divided by current liabilities ) ; overall cost of debt financing and credit impulse ( defined as the change in new credit issued as a percentage of gdp ) ) ; profitability ( return on assets, profit margin and market - to - book value ratio ) and activity ( sales growth, trade creditors ratio and change in accounts receivable turnover ). except for the overall cost of debt financing and gdp, all indicators are based on data from the ecb ’ s quarterly sector accounts. the overall cost of debt financing indicator is calculated as a weighted average of the costs of bank borrowing and market - based debt, based on their respective amounts outstanding. in response to these developments, governments swiftly launched broad - based measures to support households and firms, including job retention schemes, direct transfers, tax cuts and deferrals, as well as loan guarantees ( chart 2 ). at the same time, the ecb supported bank lending to firms by providing ample liquidity at favourable conditions, while prudential authorities took comprehensive supervisory relief measures. the decisive policy response allowed firms to draw down their credit lines in order to finance their working capital, leading to an unprecedented increase in bank lending in the spring of 2020. chart 2 loan guarantees and remaining envelopes relative to sovereign debt in 2020 in selected euro area countries percentages of gdp and percentages of outstanding sovereign debt https : / / www. ecb. europa. eu / press / key / date / 2021 / html / ecb. sp210128 ~ 8f5dc86601. en. html 2 / 13 29 / 01 / 2021 the sovereign - bank - corporate nexus – virtuous

area countries. a number of countries have lowered marginal tax rates in order to make their tax systems more employment - friendly. many countries have targeted tax cuts at the lower end of the labour market in particular. these measures have contributed to a higher demand for low - skilled workers. nevertheless, marginal tax rates still remain high in some countries. some progress has also been made with the introduction of part - time or more flexible working contracts and practices. in addition to government policies, there are signs of a gradual change in labour market behaviour related to the wage formation process. discipline seems to have improved in that field over the past decade. such a change, resulting from lower inflation expectations, is important. furthermore, there seems to be a growing awareness that, in a single currency environment, the price increases and loss of competitiveness generated by excessive wage settlements cannot be compensated by an exchange rate depreciation and may directly result in a loss of jobs. looking ahead, it is crucial that social partners continue to adhere to moderate wage developments, since this is one of the prerequisites in fostering employment and maintaining a favourable outlook for price stability in the medium term. in this respect, there is some cause for concern with regard to ongoing wage negotiations. the wage formation process also seems to have undergone changes. in a majority of euro area countries, there are signs of a gradual trend towards more decentralised bargaining and more flexibility at lower bargaining levels. this seems to happen, mostly informally, through clauses that allow firms to deviate from the sectoral or central wage agreements according to the financial situation of the firm or sector. this is encouraging. the outcomes of wage bargaining should allow not only for appropriate wage developments in the overall economy, but also for adequate wage differentiation across sectors, regions and firms. this will make it easier to account for local conditions, such as unemployment, productivity or profitability differentials across sectors, regions and firms. in short, labour market reforms have, in general, been going in the right direction in recent years and the benefits of these positive developments are clear. however, progress has been rather uneven across countries and areas. in many areas important reforms have not yet got off the ground. for instance, few changes have been made regarding employment protection policies in euro area countries, which remain amongst the strictest in the industrial countries. furthermore, in almost all euro area countries, reforms targeting unemployment benefit systems have only made slow progress. at the same time, significant mismatches between