The recent financial crisis was caused by a combination of asset price bubbles, mainly in the real estate sector, and a credit bubble that led to excessive leverage. A recurrent theme of this paper is that an appropriate assessment of the crisis should be made in light of the bubble that preceded it. Accordingly, the current situation should be compared to a ‘no-bubble’ benchmark rather than the pre-crisis period. Furthermore, the fall in GDP may be a flawed measure of the severity of the crisis if we aim to assess the true impact of the crisis on the wider public: the latter is more affected by job stability and consumption paths than GDP statistics.
An earlier version of this paper by Daniel Gros, Director of the Centre for European Policy Studies and Cinzia Alcidi, LUISS Research Fellow at CEPS, was published as an EP Briefing in a study conducted by the European Parliament.