While all EU economies witnessed a sharp decline in output during the financial crisis, the peripheral EU countries were particularly
hard hit. This is surprising, given their sound macroeconomic performance prior to the crisis. It became obvious that imbalances
had been building up underneath a seemingly tranquil macroeconomic surface. We argue that the underlying mechanisms are mirrored
by productivity developments in a tradable-non-tradable framework. Countries that were severely affected not only exhibited
low productivity growth in tradables (e.g., manufacturing), but also experienced a sharp increase in the production of non-tradables
(e.g., real estate) before the crisis.