average euro area cumulative increase of around 14 %. in spain, unit labour costs grew in total by around 26 % over this period, compared with less than 2 % in the case of germany and around 4 % in the case of austria. differing developments in unit labour costs across the euro area countries from 1999 to 2007 appear to be largely the result of differences in the growth rates of compensation per employee. however, in a few countries, including spain, the cumulated productivity growth rate over the nine - year period of reference appears to have been outstandingly low, also contributing to above average increases in unit labour costs. persistent differences in labour cost developments have important implications for the price and cost competitiveness of individual countries and, therefore, an impact on a country ’ s current account balance through labour costs per unit of output, which are usually computed as compensation per employee divided by labour productivity. the export channel. most of the euro area countries that experienced a sizeable loss in price and cost competitiveness over the period 1999 - 2007 appear to have also seen a worsening in their current account positions. in particular, in spain, the current account reached a deficit of 10 % of gdp. three main factors can explain relatively strong cumulated labour cost or price increases in individual countries. first, there are factors that can be linked to the real convergence and economic integration process of a country. in practical terms, however, it is extremely difficult to disentangle the portion of the price and labour cost differentials that may reflect an adjustment to a new equilibrium level. second, a lack of flexibility in product and labour markets can create, in the case of adverse shocks, persistent relative price and cost increases in the countries affected. the close link between the persistence of wages and inflation may be related to institutional features, such as the presence of some form of automatic price indexation of wages which continues to exist in some countries, including spain. and third, an economy can suffer a long period of strong demand pressures. these pressures may initially be related to either country - specific demand shocks or an excessive reaction to common shocks, which are then exacerbated by overly optimistic expectations on the part of consumers or firms regarding future income prospects. this situation may be further intensified by an insufficiently tight fiscal stance. such a situation is likely to lead to an inflationary process and cumulated losses in competitiveness. moreover, the impact may be seen not only on goods and services prices but also on asset price inflation, notably

as we move into 2007. canada had a sound financial system, but we still ran into trouble. during the summer, the more - than - $ 32 billion market for canadian non - bank asset - backed commercial paper ( abcp ) froze. companies that relied on this market for funding were hurt, along with investors, including some of quebec ’ s largest firms, which suddenly had no market for the paper. while there were some doubts about the assets behind the paper, the shortage of liquidity undoubtedly worsened the crisis and spread it to other markets. a lack of transparency about the assets and a poorly designed liquidity backstop didn ’ t help. ironically, even though some said that abcp was backed by just about anything, the underlying assets in the canadian d. w. diamond, and r. rajan, “ liquidity shortages and banking crises, ” journal of finance, 60, no. 2 ( 2005 ) : 615 – 47. bis central bankers ’ speeches paper ultimately turned out to be relatively sound, and the losses felt by the investors were largely the result of the market freeze. the affected companies, the provincial and federal governments, and the bank of canada worked hard to negotiate the montreal accord. this included a standstill agreement and rescheduling of payments, along with protection for smaller investors. i chose this example because we ’ re in montreal, but there are plenty more that show that liquidity can evaporate quickly for reasons that aren ’ t immediately obvious. 2 but it was clear in 2008 with bear stearns and lehman brothers that, when liquidity disappears, everybody can feel the consequences, and they are very expensive. 3 the fallout from the crisis because of credit and liquidity issues is estimated to have cost the global economy more than us $ 10 trillion in lost output. the response a lot has been done, both in canada and globally, to respond to the lessons taught by the crisis. the goal is to strengthen the world ’ s financial system so that it functions well, reducing the costs and chances of any future crisis. 4 it ’ s also to make sure taxpayers won ’ t be on the hook for the cost of any future turmoil. let me mention some of the most important reforms. internationally, policy - makers gathered at the basel committee on banking supervision to establish new regulatory standards. the basel iii package, as it ’ s called, is perhaps best known for its regulations that determine how much capital banks need to have, while taking into account