the past few years points unambiguously to a higher degree of co - movement in the us than in the euro area. yet, most studies have also found a high and increasing degree of synchronisation within the euro area, not only over a longer period of time, but also in more recent years. this degree of convergence appears to be approaching the levels recorded in the us. similar conclusions can be reached with reference to analyses which estimate the differentiated impact of asymmetric shocks and the resulting adjustment. these findings appear to contrast with the more diversified production structure of several euro area countries compared with that of states in the us. however, this evidence is the result of the combination of two factors : the distribution of shocks and the resulting country - specific adjustment processes to the shocks. the relative impact of these two forces across countries in europe is unclear. in addition to this evidence, it can been argued that analysing the evolution of the euro area economies only over the years preceding monetary union in order to gain insights into likely future developments can be misleading. indeed, their entry into a currency union may well have fostered economic integration, enhanced intra - area trade and, with the increased interdependence, raised the degree of synchronisation of the participating countries'macroeconomic fluctuations. in addition, the adoption of the same currency eliminated one source of major external instability which affected euro area economies in the past, namely exchange rate shocks of significant magnitude. moreover, higher synchronisation will follow from closer trade links. the adoption of a common currency, in fact, promotes trade among members of the union by eliminating exchange rate risk and diminishing transaction costs. in theory, an increase in trade among two or more countries could also have the opposite effect, which is to increase the divergence of business cycles. this could happen, for instance, if closer integration and trade induce a higher degree of specialisation, with the consequence that production structures will become more heterogeneous across countries, making them more vulnerable to idiosyncratic shocks. the question of which effect prevails is mainly an empirical one, as both are plausible. the evidence for the euro area so far appears to suggest that the more countries are integrated and the more they trade with each other, the more correlated the respective business cycles will be. at the present stage, it is too early to estimate the effect of stage three of emu on reducing the severity of asymmetric shocks and on

to the policy process. can one size fit all? the ecb's definition of price stability should be seen as a quantification of the ecb's primary objective, which applies to the euro area as a whole. this implies that for the single monetary policy to be considered successful in fulfilling its primary objective only aggregate developments matter. the euro area countries need not and will not always exhibit similar price developments. in the same way as the maintenance of price stability within a single country is consistent with divergences in the rate of price change among different regions and cities, price stability in the euro area is generally in line with inflation differentials among individual member countries. indeed, studies of price differentials between major us cities show that these differentials are at least as large and sometimes even larger than between countries of the euro area. whether such differentials are a cause for concern depends on their source. inflation differentials which result from what in public debates is often quoted as " a catching - up process ", as illustrated by the balassa - samuelson theory, should be seen as part of a normal process of adjustment consistent with a well - functioning economy. thus they are not a cause for concern. a catching - up process may start when the level of productivity – and thus of per capita income – of a country in the monetary union is ( much ) lower than the other participating economies. when some of its productive sectors, notably the traded goods sectors, become exposed to international competition, this country typically goes through a transitional, catching - up period when it may experience in the same sectors productivity growth faster than that attained by more mature participating countries. this catching - up process may, in turn, lead to faster price increases if the productivity growth the country gained in tradables is not matched by a similar productivity growth in its non - tradable sectors, as wages in tradables and non - tradables tend to converge. in the euro area, the impact of pure catching - up effects on the price level is likely to be minor as a substantial process of convergence in per capita income has already taken place over the last few decades. however, when inflation differentials arise from excessive wage increases, unsustainable expansion of profit margins or an expansionary stance in fiscal policy, the situation may become a cause for concern. each of these factors, in fact, may well lead to losses in competitiveness and, eventually, to losses in output and employment growth. these