hermann remsperger : convergence and divergence in the european monetary union address by prof dr hermann remsperger, member of the directorate of the deutsche bundesbank, delivered at the conference " conflict potentials in monetary unions " held in kassel, 25 april 2001. * * * the subject of convergence and divergence in the monetary union has many facets. some of them impinge directly on the issue of the appropriate monetary strategy for the euro area. after all, there have already been calls for relaxing the stability standard of the eurosystem because of the structural differences between the countries participating in emu. in addition, the eastward enlargement of the european union foreseeable in the next few years has already sparked off a debate on whether the conditions for participation in emu laid down in the maastricht treaty attach enough importance to the aspect of convergence in real terms. i shall, however, not try to answer that question until the final section of my address. i shall start with a brief glance back at the convergence process in the run - up to monetary union, and then draw your attention to the differences in growth and inflation rates that still exist in the monetary union. from the monetary policy standpoint, what interests me most are the reasons for those differences. only in that way, after all, can one verify whether such differences constitute conflict potential for the single monetary policy. i. convergence in the run - up to monetary union in retrospect, it must first of all be recalled that the road to european monetary union was mapped out in the maastricht treaty of december 1991. the treaty specifies the conditions for participating in monetary union. they include, in particular, proof of a high degree of sustainable convergence ( article 121 ( 1 ) of the ec treaty ). that entails a high degree of price stability, a convergence of long - term interest rates, a lastingly sustainable government financial position and exchange - rate stability. by the application of those criteria, which were defined more precisely in an additional protocol, it was intended to ensure that only countries which had already duly displayed their willingness and ability to pursue long - term anti - inflation policy should participate in monetary union. consequently, the second half of the nineties was marked by the efforts of the eu member states to meet the convergence criteria. the first convergence assessment took place at the end of 1996. progress towards convergence was then manifest mainly in combating inflation. already in 1996, the reference

for strong, sustainable and balanced economic growth, more stringent regulation of the international financial system and the reform of the international monetary system including the role of the imf. the objective of the framework – strong, sustainable and balanced economic growth – is surely undisputed. in addition, a process was launched on the basis of which g20 economies can assess each other ’ s macroeconomic policies. through this mutual assessment process ( or map ), member states report on the implementation of their respective political agenda in terms of their shared goal. beneficial though a peer review of this kind may be, it must not become a back door for macroeconomic fine - tuning. that may already be reflected in the selection and design of the indicators used for the assessment. for instance, in the first stage of the “ assessment of external sustainability ” within the map, a specified set of indicators is observed which are intended to identify macroeconomic imbalances. this procedure would appear, initially, to be an appropriate means of filtering for more precise analysis in the second stage. for instance, no one would deny that persistent current account imbalances pose a problem. but it is not clear why current account surpluses should be dealt with in the same way as deficits – symmetry of statistics does not imply symmetry of causes and risks. in this context, the economic policy implications are also the subject of contentious debate. besides the outright rejection of pronounced positive or negative current - account balances, the bundesbank takes a dim view, in particular, of endeavours to reduce such balances by direct political intervention. current account positions are not to be condemned per se, especially when – as in the case of germany – they result from market processes and make sense given the demographic changes that are underway. more important and lasting effects would be achieved by eliminating barriers to an endogenous adjustment of current account balances, such as pegging exchange rates at levels which are difficult to justify in terms of fundamentals. but focussing on mere balances and thresholds tends to deflect attention from such topics. considerable progress has already been made in financial market regulation. and given that weaknesses in regulation were one of the main reasons for the financial crisis, this was, in my opinion, a matter of priority. of course, mention must be made of the reform of the capital rules – also known as basel iii – which will lead to a quantitative and qualitative improvement of banks ’ capital and, as a result, increase