In particular, the delayed downward adjustment of prices and nominal wages has sharply increased the real cost of adjustment and the burden borne by the more vulnerable members of society. Private sector wage costs saw barely any downward correction in some countries, even when unemployment was starting to rise substantially (especially in Spain, but initially in Greece as well). Among the programme countries, Ireland is the only one where the downward adjustment of relative prices has been sizeable, a factor which has helped it to avoid an even stronger decline in output and employment. The disconnect between the adjustment in unit labour costs and the adjustment in the harmonised index of consumer prices (HICP) reflects the lack of competition in the domestic economy. It also reflects other cost factors affecting the evolution of prices, including fiscal consolidation being partly achieved through higher indirect taxes and administrative prices.5 It calls for great determination in reducing the excessive profit margins that result from monopolistic competition, in particular in sectors sheltered from international competition.6 Reducing rents is not only a matter of efficiency in the adjustment process: it is also a matter of equity in sharing the burden of adjustment. And this point leads me to the second part of my talk. (2)  The aggravating factors  [Slide 7] The adjustment has been costly, in some cases very costly. Some of the costs in terms of falling output and employment were, unfortunately, unavoidable.
6  The higher profit margins of the past two years need to be interpreted carefully as they in part represent a rebound after the contraction in 2008-09, and are related to composition effects and capital deepening via labour shedding. 7  See ECB Structural Issues Report (2012), Euro area labour markets and the crisis, ECB Occasional Paper No 138, October 2012. 8  On average in the three Baltic states compensation per employee fell by 10.4 pp cumulatively between 2009 and 2010. 4  BIS central bankers’ speeches  [Slide 8] What about output? Per capita GDP has been falling steeply in Greece. In Ireland the turning point was reached in 2011; in Spain, Portugal and Greece that point is expected to come in 2013 or early 2014. Is this expectation credible? Controlling for exogenous variables, such as world demand, term-of-trade or oil shocks, the expectation depends on a resolute pursuit of the reform and consolidation policies as well as on three key interrelated aspects: the impact of fiscal consolidation; the access to finance for corporates and households; and the restoration of confidence. Let me consider these in turn. Since the sovereign debt crisis escalated in mid-2010, in the stressed countries the fiscal stance has become very restrictive, access to finance has become very limited and confidence very low. In such an environment it is not possible to isolate the short-term impact of these three elements while private and public sector balance-sheet adjustment is under way.