The relationship between key economic indicators of the euro area after the financial crisis

Abstract

Three years after the deepest recession of the last decades, it seems that many European policies still remain to be addressed and that the sense of causality between real economy and economic growth indicators has suffered alterations which, if properly observed, can be used to predict future economic trends. In a recent report IMF analyses the link between the weak balance sheets of governments and the banking sector revealing new tensions in financial markets, particularly in the Euro area. Further, ECB points out that it is crucial to integrate the monetary and fiscal policies, both at a national and EU level. Therefore, at a national level, a list of priorities would start with restoring public debt sustainability, increasing savings and enhancing potential growth. And at the EU level, fiscal consolidation should be undertaken in a way that would minimize its negative impact on the real economy. Moreover, monetary policies should be guided as to mitigate market volatility while ensuring banks' liquidity and efficient actions taken in order to eliminate weaknesses in balances sheets while safeguarding lending capacity. By using econometric methods as Granger causality or panel-data regression, we capture the interdependencies between the real economy and the financial market, considering the isolated influences of other factors like: effects of global financial crisis on monetary union, differences between Euro area countries, etc. Our results show the existence of a bidirectional causality between stock market and monetary policy, while there is no causality between stock market and real economic growth.