Rather, it was left on deposit or used to invest in other financial assets. The huge increase in borrowing by one part of the population was broadly matched by a big increase in saving by another part. The increase in house prices over the decade to 2007 – and the massive financial flows associated with that appreciation – represent a huge redistribution of wealth between different households within our society. Two important points should be drawn from this episode. First, any analysis of the increase in household debt over the past decade has to pay equal attention to the record accumulation of financial assets. They are two sides of the same coin. Second, changes in house prices do not result in significant changes in aggregate household wealth: for every winner gaining from higher house prices is a loser facing less affordable housing. But that does not mean that changes in house prices can not have significant implications for the macroeconomy. House price changes may directly affect aggregate spending both through their effect on the value of housing collateral, and hence on the ability of households’ to access credit, and through the different propensity of winners and losers to spend their “windfalls”. A debt hangover? Even though the accumulation of debt was not driven by excessive consumption spending, the sharp falls in asset prices associated with the financial crisis have led to a marked deterioration in households’ financial position – assets are worth less but the debts still need to be repaid.

At the same time, when looking at accumulated unit labour cost changes we observe that a number of economies which lost cost competitiveness also experienced a loss of market shares, less gains in job creation and/or deteriorating current account position. Despite the decline in the euro area average unemployment rate over the last few years, unemployment remains too high in several countries and regions of the euro area. In these countries and regions, wage increases should not fully exhaust productivity gains in order to provide incentives for firms to create additional jobs. In this respect, sufficient wage differentiation is also required to improve the employment opportunities for less skilled workers where there is high unemployment for this category of employees. The extent to which an increase in nominal wage growth leads to upward pressure on inflation depends crucially on trend labour productivity growth. Under normal circumstances, stronger labour productivity growth would justify an increase in nominal wage growth, thus allowing wage earners to participate in economic growth without adding to inflationary pressures. But for the same reason, without sustained improvements in labour productivity higher nominal wages would not lead to improvements in real purchasing power, but fuel inflationary pressures. Importantly, industries are characterised by different productivity developments. Therefore, wage setting should allow for sufficient wage differentiation and agreements in one industry or sector can not readily be transferred to others. BIS Review 52/2007  1  Those are the reasons whey the Governing Council calls for a high level of responsibility from social partners.