The diverging competitiveness is a consequence of various factors and policies as well as of market adjustment mechanisms, which in some cases reflect rigidities in labour markets and the low degree of integration and competition in certain product markets, particularly for services. The persistence of these developments suggests that adjustment mechanisms are functioning slowly and that self-equilibrating forces are not sufficiently strong. The extent and the cumulative effects of differences in competitiveness between some euro area countries raise concerns about their impact on growth. In addition, other factors – some exogenous, such as competitive pressures resulting from globalisation, and some internal, influencing consumer sentiment – affect economic activity and tend to compound the adverse effects of the erosion of competitiveness in some countries or partly offset the benefits from the increased competitiveness attained in other countries. A better understanding of the factors and processes that determine economic fluctuations, inflation persistence and competitiveness developments across the euro area countries will contribute to the diagnosis of the present situation and the assessment of future trends. Two papers in this workshop provide insights and useful results to this end. The extent of synchronisation of economic activity in Europe is examined in the paper by Domenico Giannone and Lucrezia Reichlin, which evaluates long-run tendencies and cyclical fluctuations. Different growth trends may be due to different patterns of specialisation, which can be desirable within the monetary union provided that countries can share risk through capital market integration.

Whether such divergences create problems for the performance and functioning of a monetary union depends on their causes, size and persistence. What are the facts about the relative macroeconomic performances of euro area member countries? And what is the diagnosis about the causal factors and the underlying processes that explain them? I would like to point out two interesting facts that are contrary to popular perceptions. The first is that during the first six years since the creation of the euro, the growth and inflation differentials observed between member countries have not been greater than those recorded in the 25 years before the establishment of EMU. On the contrary, according to some measures, the dispersion in growth rates has recently reached a historically low level. The second fact is that both growth and inflation differentials in the euro area since the introduction of the euro have been broadly of the same order of magnitude as the corresponding differentials observed across regions and metropolitan areas in the United States. These facts would seem to suggest that, at least on the basis of size, the heterogeneity  2  BIS Review 46/2005  observed in the macroeconomic performance of euro area member countries is not exceptional and thus need not be a cause of alarm. Nevertheless, there are certain other developments that suggest caution and point to the need for a deeper and more comprehensive analysis. One such development relates to the significant and persistent divergences in measures of competitiveness between member countries.