as shown by buti and turrini ( 2012 ), 4 this development was not fully associated with gains in productivity from lay - offs but rather, at least in part, with slower wage growth dynamics. in addition, such a decline in deficit countries seems to have occurred mostly in non - tradable sectors, which is consistent with internal rebalancing. in other countries, such as italy, where competitiveness fell sharply prior to the crisis, there has so far been no evident correction of competitiveness. in other words, the pace of adjustment has been different across countries ; imbalances have not been corrected everywhere to the same extent. [ slide 5 ] finally, we have observed a very strong improvement in structural primary fiscal balances – that is, fiscal balances adjusted for the economic cycle and for one - off factors. in greece, the structural primary balance in percent of gdp, which had reached extremely high levels in 2009, is estimated to have improved by more than 13 percentage points cumulatively between 2009 and 2012. in portugal, the structural improvement has been see ecb monthly bulletin article ( 2011 ), the ecb ’ s non - standard measures – impact and phasing out, july 2011, pages 55 - 69. cheptea, fontagne and zignago ( 2012 ), european exports performance, banque de france wp 393. buti, m, and a. turrini ( 2012 ), slow but steady? achievements and shortcomings of competitive disinflation within the euro area, ecfin economic brief, issue 16, november. bis central bankers ’ speeches about 6 percentage points of gdp. these improvements give an idea of the real adjustment effort made by these countries. [ slide 6 ] but being cautiously optimistic does not mean that there are no major challenges or tasks ahead of us. indeed, the economic and social priority is to reduce the very high unemployment level. 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

benoit coeure : adjustment and growth in the euro area economies speech by mr benoit coeure, member of the executive board of the european central bank, at the nova school of business and economics and the bank of portugal, lisbon, 22 february 2013. * * * introduction1 dear governor costa, ladies and gentlemen, it is a great pleasure to be here today and share with you my thoughts on the adjustment under way in the euro area. this is a challenging issue, especially here in lisbon, as portugal is at the heart of this process. taking the lehman collapse as a starting point, the economic and financial crisis has now lasted four and a half years, almost one - third the age of the euro. for the stressed countries, this has been a tough time. it saw a sharp decline in gdp and a sharp rise in unemployment, with young people particularly affected. people ’ s daily lives have not yet visibly improved. this is why it is important to focus on the progress made during the past five years and on why and how reforms can create income and jobs. i have in mind three questions : ( i ) how much adjustment is still needed? ( ii ) why have the costs been so high? ( iii ) are conditions in place to restore growth? the public would probably formulate these questions differently : can we hope that things will get better? will the policies work? and will we see an improvement in our daily lives? to answer these questions i will organise my talk in three parts. first, i will briefly recall how the imbalances and structural problems came about and how deep they were before the steps towards reform were taken. this is critical to understand the subsequent adjustment process, the costs involved and the way forward. i will then describe the progress to date. the adjustment process is not yet complete but it has already been significant, and some countries, including portugal, have taken important steps towards sustainability. second, i will reflect on the factors that have made the adjustment more painful than it would have been otherwise. my main point will be that a number of rigidities have been preventing a more significant and swift downward nominal adjustment, thereby causing a sharp fall in production and employment. on top of these rigidities, the interplay of an impaired credit channel, fiscal consolidation and falling confidence has deepened the recession. third, i will argue that there are good reasons to be cautiously optimistic, if reforms continue as planned. european solidarity has helped to smooth the adjustment and prevented sudden - stop