Corona crisis has increased the risk of stagnation in the euro area

Abstract

Stagnation is a period of slow economic growth often characterised by low interest rates and low inflation. It is most commonly associated with the development of the Japanese economy since the early 1990s. In the euro area, the corona crisis together with an already ageing population, diminished productivity growth, and, in places, high levels of debt even before the onset of the current crisis may weaken the economy's ability to recover. There is a danger of the economy slipping into an equilibrium of low interest rates and low inflation, i.e. a liquidity trap. There is also a risk of inflation expectations declining. The policy response in the euro area to the economic outlook weakened by the corona crisis has been swift and decisive. Well-targeted policy measures can mitigate the risk of the economy following an adverse path.