In particular, some of the job losses in the non-tradable sector are the outcome of the necessary rebalancing towards tradables and away from previously unsustainable domestic demand growth. However, the rise in unemployment in a number of countries has been aggravated by delays in structural reforms and, as I said, by a lack of downward flexibility in prices and wages after 2008. Job losses were largest among low-skilled, temporary workers in Spain and in the non-manufacturing sectors.7 As employment fell, unemployment – particularly of the young – jumped, especially in Greece and Spain, where more than a quarter of the total labour force is currently without a job. There was also a sharp increase in unemployment in the Baltic states – it rose from 5% in 2007 to 18% in 2010 on average in Estonia, Lithuania and Latvia. However, since 2010 in all three countries unemployment has fallen relatively quickly. By the end of 2012 it had improved by about 10 percentage points.8 In the most stressed euro area countries, there are no signs of a reversal yet. This is the result of the inherited very rigid product and labour markets, which have started to change and need to continue to do so vigorously to prevent further job losses. Again, this is not only a matter of efficiency, but also a matter of equity. Europe cannot afford a lost generation. 5  See ECB Monthly Bulletin Box (2012), Rebalancing of competitiveness within the euro area and its implications for inflation, June 2012, pages 64–66.
While ex ante expectations of a fast convergence  1  I wish to thank Beatrice Pierluigi for her contributions to this speech. I remain solely responsible for the opinions contained herein. BIS central bankers’ speeches  1  across euro area countries might initially have been reasonable, given the favourable environment created by the monetary union, the degree of sustainable convergence ex post turned out to be very limited. In many countries, excessive private/public consumption and residential investment spending, partly resulting from excessive debt accumulation, led to persistently higher HICP and unit labour costs with respect to the euro area average. At the same time, the supply side was not able to catch up with demand, due to the fact that investment spending was not channelled towards activities able to generate high future returns and due to important structural rigidities in the labour and product markets, which policy-makers largely neglected to tackle in the years before 2009. This process was aggravated by weak fiscal institutions and prudential supervision. All this contributed to the accumulation of large imbalances and vulnerabilities. In this environment, the EU framework for economic governance proved to be unable to enforce an early implementation of critical reforms or to prevent imbalances. Let me make the point with a few figures. The charts that I will show today focus on the three programme countries as well as Spain. Of course, the adjustment process is in fact taking place in a larger number of countries, some of which joined the euro area after 2007.