jurgen stark : reflections on the maastricht process from one of the architects dinner - debate by dr jurgen stark, vice president of the deutsche bundesbank, at droege & comp. ltd., london, 3 june 2003. * * * the creation of economic and monetary union and the introduction of the euro meant that we in continental europe have achieved the highest degree of monetary policy integration. for the inhabitants of a country which was not one of the founding states of the european economic community and which has a great historical past of its own, this process, this political “ euro project ”, may perhaps be difficult to appreciate. however, emu is only the latest development in european monetary and exchange rate cooperation, which, in turn, is part of a much broader process initiated in europe 50 years ago. the euro cannot be fully understood unless there is an appreciation of this process. only with this in mind can we begin to grasp how countries with different languages and traditions, which have enjoyed amicable relations during various periods in history but which have also fought against each other in many cruel wars, could eventually take the momentous decision to entrust monetary policy to a supranational decision - making body : the governing council of the eurosystem. it is no exaggeration to state that with the creation of the single market and its completion marked by the introduction of the euro banknotes and coins in 2002, we have launched the most comprehensive and challenging economic reform project in the history of continental europe. this has been a particularly clear demonstration of european policymakers ’ ability to take decisive action. in less than a decade emu has evolved from a remote and unlikely possibility to reality. apart from all the difficulties and challenges we are facing at present with weak growth, high unemployment and increasing budget deficits no one outside continental europe should underestimate the magnitude of what has been achieved in monetary union to date. the europe of today should not be confused with europe 10 or 15 years ago. we have liberalized and deregulated markets. however, more needs to be done. the convergence process which permitted the creation of emu has brought about fundamental changes which are irreversible. admittedly, economic performance in continental europe is weak at present. however, the european economy is more resilient to economic shocks than ever before. the process of european integration has decreased the likelihood of asymmetrical shocks. in particular, unwarranted monetary and exchange rate

it suggests that the differentials originate from the fact that adjustment mechanisms in the euro area are not functioning as smoothly as they might and that policies other than monetary policy are not consistent with inflation rates close to the euro area average. thus, other factors are contributing to the inflation differentials within the euro area, including misaligned fiscal policies, wage dynamics not linked to productivity developments ( something reflected in the significantly different rates of growth in unit labour costs across the union ), and structural inefficiencies such as rigidities in product and factor markets. persistent differentials that result from these factors lead to a loss in competitiveness and cannot be considered benign. figure 8 indicates a strong positive relationship between average inflation rates in different euro area economies and the average growth of unit labour costs over the period since monetary union began. figure 8 : cumulative deviation of inflation and ulcs relative to euro area average ( 1999 - 2006, in percentage points ) - 5 - 10 - 15 be de ie gr es fr it inflation lu nl at pt fi ulcs source : bis database figure 9 : dispersion of real gdp growth rates within euro area ( 13 countries ), us ( 50 states and d. columbia ) and us ( 8 regions ) ( unweighted standard deviation in percentages ) 5. 00 ea13 4. 50 us50 us8 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 1. 00 0. 50 0. 00 source : us bureau of economic analysis and eu ameco database it is important to note that the process of nominal convergence from the early 1990s onwards, which culminated in the adoption of the euro, was not accompanied by a greater dispersion of real gdp growth rates. nor has dispersion increased following the adoption of the single currency. if any trend is discernable, it is a slight downward one, with dispersion remaining close to its historical average of around 2 percentage points, which is no greater than that found in the us. moreover, inflation and growth across the euro area appear to move together. those countries with higher than average inflation rates ( ireland, greece, spain, for example ) appear to have higher growth rates. this suggests that, to the extent that inflation differentials do not reflect differences in growth rates of productivity, the dampening effect of loss in competitiveness has been offset by other factors, such as interest rate decreases in the period up to the adoption of the euro, inflow