European Economy. Quarterly report on the euro area 2008.

Abstract

The external headwinds that the euro-area economy has been facing for several months have gathered strength. Firstly, uncertainties about the duration of the financial turmoil, the ultimate scale of its costs and the location of the losses have intensified and continue to affect investor confidence. While the ECB and other major central banks have taken decisive action to stabilise money markets, the functioning of these markets has not yet returned to normal. Banks are still reluctant to lend to each other at longer maturities, and the use of central-bank lending facilities remains much higher than usual. Meanwhile, other key credit markets are disrupted. The fear of losses from defaults on US sub-prime mortgages remains pervasive and evidence also suggests that defaults have spread to other sectors of the US economy. Problems are emerging with higher quality US residential mortgages, as well as with commercial mortgages, automobile loans and credit-card debt.