Reviewing the latest economic and financial developments in the euro area, the report finds that after some improvement at the end of 2008, the crisis in financial markets intensified again at the beginning of 2009. Financial market sentiment is now clearly being hampered by the worsening real economy.

In the last quarter of 2008, euro-area GDP fell by 1.5% (q-o-q), the worst performance in decades. Investment was hit particularly strongly with business investment contracting markedly. External trade has been severely affected by the collapse in global demand, which is also starting to weigh heavily on emerging economies. Short-term prospects are not encouraging. In February all euro-area survey indicators showed another drop to new record lows. A few global and euro-area sentiment indicators sent very modest signs of improvement in, respectively, February and March but more solid evidence is needed before concluding that the economy is stabilising.

Competitiveness in the euro area

This issue of the Quarterly Report on the euro area (QREA) also includes a special report on developments in price competitiveness within the euro area since the launch of the euro. Competitiveness imbalances have built up within the euro area, increasing the exposure of some Member States to the financial turmoil. Over the past decade, there has been a significant divergence in Member States' relative cost and price positions and current accounts. While some of the divergence has been driven by benign factors, the report also identifies underlying domestic imbalances in some Member States, e.g. excessive domestic demand, high private sector and external debt as well as surges in house prices.

Re-balancing competitiveness within the euro area will require policies aimed at correcting these imbalances. In particular there is a need to increase flexibility in markets, avoid fiscal pro-cyclicality and step up the monitoring of the financing of current accounts, of asset markets and of private sector balance sheets.