Macroeconomic divergences between euro area countries: size, causes and implications

In recent years, economic activity in the euro area has grown at a modest rate: average growth between 2001 and 2005 was barely 1.4%, only just over half the rate recorded in the United States during the same period. However, this scant buoyancy of activity was not common to all Member States. Some countries, such as Greece, Spain and, in particular, Ireland, grew at well above the average rate for the area as a whole, while in other countries, such as Germany, Portugal and Italy, growth was very slack. These differences have led to some debate regarding the impact of the single monetary policy on discrepancies in the tempo of economic activity in the various euro area countries and on the difficulties that this heterogeneity may pose for the conduct of monetary policy by the ECB. This debate bears some relation to the discussions of the 1980s and early 1990s regarding the importance of the loss of stabilising economic policy instruments for the member countries of a monetary union. This article attempts to analyse this problem using the evidence available on the size and origin of cross-country economic divergences within the euro area. In particular, the contribution of the absence of national monetary and exchange rate policies to the dispersion of growth and inflation rates is assessed and its normative implications are considered. Thus, Section two describes the degree of similarity between the behaviour of the national business cycles. Section three explores the differences in the degree of exposure to the various types of shock and in their transmission mechanisms within each national economy. Section four examines the influence of the monetary union on the observed discrepancies. Finally, Section five sets out the main conclusions.