The euro-member countries would have no possibility of adjusting either interest rates or their exchange rate independently, and they would have somewhat limited scope for independent fiscal adjustment because the Stability and Growth Pact would constrain the size of overall public sector deficits. And alternative adjustment mechanisms -- such as the labour migration or fiscal redistribution that helps to alleviate similar regional problems within individual countries -- are not well developed at the level of Europe as a whole -- nor are they likely to be, at least in the near future. So the risk is that the one size-fits-all interest rate could result in economic weakness and unemployment in some areas if the European Central Bank pursued a firm monetary policy or unwanted inflation in others if it were more accommodating. Such divergent national monetary policy needs within the euro-area could result from differences in the cyclical position as between one country and another; or from different fiscal positions, BIS Review 89/1997  -2although these, as I say, should be constrained by the Stability Pact; or they could result from external shocks which had disproportionate effects on some countries as against others. They may be the more likely because Europe starts from a position of generally very high levels of unemployment [ranging from around 7% in the UK, to around 10% in Germany, over 12% in France and Italy, and even more in Spain on a consistent basis].

Palmqvist, Stefan (2013), “Konsumentprisindex i Sverige och Kanada är inte så lika” (The CPI in Sweden and Canada are not so similar) (In Swedish) Post on the blog Ekonomistas, http://ekonomistas.se/2013/11/20/konsumentprisindex-i-sverige-och-kanada-ar-inte-sa-lika/. Reserve Bank of Australia (1998), The Implications of Recent Changes to the Consumer Price Index for Monetary Policy and the Inflation Target. Reserve Bank of Australia Bulletin, October. Reserve Bank of New Zealand (1999), Minor Technical Change to Inflation Target. Press release, 28 October. The Riksbank (2010), The Riksbank removes the tolerance interval from its specified monetary policy target Memorandum, Basis for Decision, 31 May 2010, http://www.riksbank.se/Upload/Dokument_riksbank/Kat_publicerat/Pressmeddelanden/2010/ nr27_beslutsunderlag.pdf. The Riksdag (2014), Committee on Finance appoints top names to evaluate the Riksbank's monetary policy. Press release, 17 June. Skingsley, Cecilia (2015), Inflation-targeting policy after the financial crisis. Speech at Almega, 22 May. Svenska Dagbladet (2015), “Professorn varnar för låga räntan,” (Professor warns about low interest rate) (In Swedish) 18 November. 10  BIS central bankers’ speeches  Figure 1. Stable Swedish economy  Note: The yield differential refers to 10-year government bonds, monthly data. Sources: Thomson Reuters and the Riksbank  Figure 2. Major direct impact of interest rate changes on CPI inflation  Note: Weighted mortgage rate is chained in December 2014 due to an altered measurement method. Sources: Statistics Sweden and the Riksbank  BIS central bankers’ speeches  11  Figure 3. CPI inflation varies a lot more than CPIF and HICP inflation  Note: The CPIF is the CPI with a fixed mortgage rate. HICP refers to the EU-harmonised index for consumer prices.