One explanation for this is that, as the upward phase of the financial cycle can be very prolonged – according to estimates by BIS scholars, the typical duration of the financial cycle is around 16 years10 – perceptions of risk and value adjusted upwards. Historical relationships between asset prices, debt ratios and underlying productivity levels were deemed no longer to hold. Hence, developments that merely reflected the longer financial cycle were falsely believed to be structural. Another explanation is that observers overestimated future productive capacity due to the effect of the financial cycle on real-time potential growth estimates.11 This in turn could have led firms’ and households to bring forward future consumption and investment into the present, based on an overestimation of their lifetime income. One way such misperceptions can arise is if a prolonged credit-driven economic expansion weakens supply constraints and raises estimates of potential output, making growth appear more structural in nature. In Spain, for example, the boom in the construction sector raised both domestic participation rates and immigration levels. The European Commission’s latest estimates of potential growth rates are in the range of 3.2% and 4% for the period 2000–2007, driven mainly by the increasing labour contribution (adding around 2 percentage points on average per year). Since 2008, however, the labour contribution has been the largest drag on potential growth, for example, subtracting more than 2 percentage points from the 2013 estimate. A final explanation is that observers mistook the significance of inflation differentials within the euro area.
Yet we have ageing populations across the euro area, so if we desire to GDP per capita in a sustainable manner, we have no choice but to face this challenge head on. Thank you for your attention. 10  BIS central bankers’ speeches