But I realise that some more structured answers have to be given at some point, and that’s what I would like to do today. As you all well know by now, the ECB has been assigned the primary objective of maintaining price stability in the euro area. The ECB therefore has no choice but to take a euro area perspective: its policy decisions aim at area-wide price stability. Those decisions draw on all available information, including that deriving from national indicators, but they cannot be tailored to the specific needs of a single Member State. As we have seen, economic divergences can emerge and persist across countries and regions within the euro area. In principle, there are several reasons why such variations in growth or inflation may emerge within a monetary union. Initial differences in the level of development or income may lead to some countries catching up with the area-wide average through a period of faster growth, associated with relative price changes.1 Certain economic shocks may affect the economic performance of one country but not another.2 The transmission of monetary policy may differ across countries and regions because of variations in economic and financial structures.3 Although the economic literature prior to the introduction of the euro emphasised the importance of asymmetric shocks, the cross-country variation in growth and inflation in  1  One explanation of these catch-up effects is the so-called Balassa-Samuelson effect, see: Balassa, B. (1964). “The purchasing power parity doctrine: A reappraisal,” Journal of Political Economy 72, pp.

BIS central bankers’ speeches  3  Another theoretical argument can be made suggesting that independent national monetary policies could be more expansionary when national fiscal policies turn restrictive in the pursuit of fiscal consolidation. In principle, national monetary policies have the advantage of being able to counter the negative pressure on inflation produced by the fiscal tightening. In practice, however, countries in urgent need of fiscal retrenchment do not necessarily experience lower inflation. At present, inflation is higher than the euro area average in Portugal, Ireland, Spain and, in particular, Greece. In a counterfactual without the euro, the national monetary authorities responsible for monetary policy could not implement a more expansionary policy stance than is currently the case in the euro area as a whole without endangering their credibility and the maintenance of price stability. These observations are broadly supported by the experience here in the United Kingdom. Despite the extra degree of freedom offered to policy-makers by remaining outside the euro area, economic activity in the UK remains further below its pre-crisis peak than either in Germany or France. In relative terms, the depreciation of sterling against the euro has not cushioned growth but rather led to a higher rate of domestic inflation in Britain than in the euro area. In sum, I would maintain that there are no clear reasons for believing that cross-country variation in economic performance within the euro area has proved larger than would have been the case if national monetary policies had been retained and the euro not introduced.