[Slide 1] A property worth 100 in 1998 would have sold at 280 in 2007 in Spain and Ireland and at 230 in Greece. Between 1998 and 2007 bank lending for house purchases increased by more than 400% in Spain, 500% in Ireland and 800% in Greece. The credit boom led to a sharp increase in private sector indebtedness. But such imbalances have not only been a private sector story. Between 1998 and 2007 the compensation of employees in the public sector (that is the number of employees times their per capita wages) increased cumulatively by close to 180% in Ireland (i.e. five times the euro area average) and by close to 110% in Greece (i.e. three times the euro area average). Public spending growth has systematically exceeded nominal GDP growth also in Portugal (about double the average for the area). Fiscal discipline had been clearly insufficient. Even when the headline fiscal deficit was suggesting a healthy situation until around 2008, that was misleading as GDP was above potential and strong tax revenues resulting from housing booms were not sustainable. During the 2008–09 crisis, the sharp drop in domestic demand caused a significant fall in revenues, which in some previously booming countries were based on very cyclically sensitive taxes, such as corporate taxes, stamp duties and capital gains taxes. At the same time, government spending was increased by crisis-related measures.
Such reforms, if well designed and fully implemented, will reorient the engines of growth towards high-productivity sectors and enable companies to thrive in the Single Market and in the global economy. Studies based on general equilibrium models have confirmed that the long-run growth effects of such reforms are indeed positive and potentially very high.13 [Slide 9] This is my last chart. It shows model-based simulations carried out for the Portuguese economy by using a large-scale new-Keynesian dynamic general equilibrium model of the euro area and the world economy.14 In the model simulations shown, the wage mark-up is reduced by 10 percentage points over a period of five years. The size of the reduction mimics the cumulated gross wage differential between Germany and the rest of the euro area countries between 2005 and 2010, that is, in the five years after Hartz IV reform. To obtain a comparable set of results, the price mark-up is also reduced by 10 percentage points over five years. These simulations show clearly that to maximise the impact of reforms on GDP and employment it is important that those reforms have to reduce both wage and price mark-ups. The simulations also show that the impact of reforms is positive already in the second year and increases progressively afterwards. All this is consistent with other  13  See Gomes S., P. Jacquinot, M. Mohr, M. Pisani (2011), Structural reforms and macroeconomic performance in the euro area countries. A model-based assessment, ECB working paper no.