Conclusions

Summary

The financial crisis of 2007–2008, which led to the Great Recession of 2008–2009 and triggered the sovereign debt crisis in the euro area in 2010, has led to a lot of soul searching among professional economists. With the benefit of hindsight, it can now be said that these crises were misdiagnosed in two ways. First, many economists interpreted these crises to have increased the need for more flexibility in labour and product markets. Structural reforms aimed at making both labour and product markets more flexible were seen as the tools to boost economic activity and to launch countries into a higher growth path. Thus, although the initial shocks were understood to have originated from a financial and banking implosion, which led to a collapse of aggregate demand in 2009, many economists surprisingly advised to fix the supply side.