than in the past. this could be a concern in view of the generally limited price and wage flexibility, low labour mobility and the lack of a risk - sharing mechanism due to the still incipient financial integration. time will judge the severity of this potential effect. montary union with the completion of the single market and european monetary union the economic and the monetary side of the “ triangle ” have been completed. this raises the fundamental question : can monetary union work and survive without the third side of the triangle, which is without a fully - fledged political union? the answer is clear : yes, it can. it is possible that, over the very long term, strong elements of a political union may ( need to ) emerge, but for the time being economic and monetary union ( emu ) can proceed perfectly well without a political union in the form that we understand today. here are the main arguments : first, monetary union in itself has a clear political dimension. it entails the transfer of national monetary policy decision - making powers to a supranational entity, the european central bank. relinquishing national sovereignty in such an important field is a substantive contribution to political integration. a central bank is, after all, an element of statehood. the maastricht treaty has made the ecb independent of any political influence so that it is able to fulfil its clear mandate of preserving price stability. monetary policy - making is hence not only centralised but also depoliticised. this step was only possible because euro area members had achieved a high degree of convergence in monetary policy attitudes and preferences in the run - up to monetary union. moreover, the way participating countries see themselves and their role as nation states has changed profoundly. in this respect, the launch of the euro marks the most recent and far - reaching step. national sovereignty has not only been transferred in the area of monetary and exchange rate policies but also in other key policy areas, such as competition and trade. finally, a single market has been established. as a result, the euro area countries already share important elements of state formation which are also key to the functioning of monetary union. flexibility second, from a purely economic perspective, what else is needed to make the single monetary policy work? most importantly, flexible markets are needed to enhance the ability of individual countries to respond to specific circumstances and economic shocks. wages and prices in particular may need to adapt more quickly and strongly. the mobility of capital will become an

assume, for simplicity ’ s sake, that these goods are only produced domestically. if the prices of these products grow at a rate of 2 % per year, the overall average inflation is 2. 6 %, exceeding the 2 % objective of most central banks in advanced countries, including the ecb ’ s. if some of these goods and services are produced abroad, the rate of their price increase may be even higher, due in particular to the balassasamuelson effect that i mentioned previously. as the shifting of production to countries with lower wages tends to fade away, any wage increase or exchange rate appreciation in eme will lead to higher import prices in advanced economies. the central bank then has to choose between either revising the inflation rate objective upwards and taking account of imported inflation, or maintaining the inflation objective unchanged, which means lower core inflation. in both cases, headline inflation is bound to be higher than core inflation. this means that price increases for imported goods must not feed into wages and domestic prices. the implications for monetary policy are quite complex. the stance of monetary policy cannot be assessed on the basis of core inflation, given that the interest rate incorporates expectations of headline inflation. keeping the policy interest rate unchanged while headline inflation rises – even if core inflation remains unchanged – implies de facto allowing for the monetary stance to become more accommodative. over time this is likely to impact on core inflation. it is certainly a challenge to make sure that core inflation remains subdued and lower than headline inflation if imported goods prices increase by more than 2 %. this can be achieved without additional monetary policy tightening only in a friction - less world, in which domestic wage and price - setters accept the permanent change in relative prices. we obviously need more work on these issues, which are particularly relevant in light of past experience. indeed over the past decade international and national institutions have often made forecast errors in the same direction, underestimating inflation and overestimating growth in advanced economies ( chart 6 ). this has led to an overly accommodative policy. if we want to avoid repeating the same bias, we should be more alert to this issue. macroeconomic policies another way in which advanced economies are affected by globalisation is through its unbalanced nature. globalisation is very advanced in trade and economic activity. in the financial area, however, globalisation is more limited, in the sense that emes are characterised by an excessive demand for and an insufficient production of high quality