By contrast, in Greece, Portugal and Spain reforms were less fast and comprehensive. In Spain, for instance, slow implementation of labour market reforms meant that wages continued to rise until the third quarter of 2011, despite output falling by almost 5% in that time. In Greece, labour market reforms were enacted early on but without in parallel opening up product markets, meaning that when wages adjusted, prices did not: the price level only began falling in October 2012. The result was that these countries experienced a quantity adjustment – higher unemployment – which triggered a protracted disinflationary process that is still ongoing.12 In sum, while both options have been costly in terms of output and employment, and notwithstanding differences in labour market flexibility, in a situation where countries had to undertake an internal devaluation, accelerating the pace of reforms seems to have been the better approach. It has led more quickly to higher growth prospects and higher current and expected inflation – i.e. conditions where the positive income effects of reforms can outweigh the negative real interest rate effects. This contrasting experience also, in my view, disproves the view that reforms should be staggered because political capital is scarce. We have seen that this type of thinking tends to lead to authorities avoiding taking on organised vested interests – such a protected sectors – and instead prioritising measures that affect a more diffuse group – such as lowering minimum wages.
Several euro area economies had experienced a sharp rise in  6  See Gomes, S., P. Jacquinot, and M. Pisani (2011), “Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment”, ECB working paper no. 1323; Berger, H. and S. Danninger (2007), “The Employment Effects of Labor and Product Market Deregulation and Their Implications for Structural Reform”, IMF Staff Papers Vol. 54, No. 3; and Nicoletti, G. and S. Scarpetta (2005), “Product Market Reforms and Employment in OECD Countries”, OECD working paper no. 472. 7  See Eggertsson, G., A. Ferrero, and A. Raffo (2013), “Can Structural Reforms Help Europe?”, Journal of Monetary Economics, forthcoming. 8  See Gerali, A., A. Notapietro, and M. Pisani (2014), “Structural reforms at the zero lower bound”, mimeo. 9  See Andrés J., O. Arce, and C. Thomas (2014), “Structural reforms in a debt overhang, Banco de Espana, working paper n. 1421. 10  For a discussion see Blanchard, O., K. Froot, and J. Sachs (1994), The Transition in Eastern Europe, University of Chicago Press. 11  See Blanchard, O., and F. Giavazzi (2003), “Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets”, Quarterly Journal of Economics, Vol. 118. BIS central bankers’ speeches  3  unit labour costs (ULC) associated with the pre-crisis credit boom, which required a period of internal devaluation to correct. And they were starting out with rigid economic structures.