The worst recession in the euro area’s short history seems to have come to an end. After five consecutive negative quarters, the euro-area economy expanded again by 0.4% quarter-on-quarter in the third quarter. The rebound in activity reflects improvements in the external environment, the unprecedented fiscal and monetary policy actions that were taken worldwide and the improvements in financial conditions.

The outlook for the euro-area economy as it emerges from recession is, however, still uncertain. A particular source of concern is the impact of the crisis on labour markets, an issue which is analysed in this report.

The report also discusses the driving forces of exchange rate movements during the crisis. Looking forward, the December issue of the QREA looks into structural reforms, first by shedding some light on the impact of the crisis on public perceptions of the need for reforms and second by quantifying the impact on growth of reforms aimed at stimulating research and innovation, competition and human capital.

Trends in European banking

The report's first focus section looks at how long-term trends in the euro-area banking sector may be affected by the financial crisis. The analysis suggests that pre-crisis trends relating to size, concentration and integration are likely to persist with banks becoming larger, fewer and more international in the years to come. The EU Financial market is also bound to become more integrated as the underlying driving forces remain in place in terms of risk diversification.

But the crisis has also put pressure on the banking sector to restructure. Banks' financing strategies are likely to shift towards a stronger equity component, while their business models are likely to concentrate more on core markets. Overall, the euro-area financial system may ultimately be less dominated by banks relative to the activity of market financing and of other financial intermediaries.

Ensuring fiscal sustainability for a recovering euro area

The crisis-related fiscal expansions and the ageing population raise questions about the sustainability of public finances in the euro area. The second focus section takes up this issue in depth. With the share of the working-age people falling and the share of the old increasing, economies are faced with lower economic growth and higher costs associated with providing services for the ageing population.

This results in pressure on public finances. Ensuring fiscal sustainability in the euro area requires time-consistent policies with a broad approach, consisting of fiscal consolidation, efforts to increase employment and enhance productivity, and structural reforms that prepare the euro area’s social security systems to face the future challenges.