savings and investment by the private sector and government. it should not be surprising, then, that the nominal exchange rate cannot be relied upon to bring about lasting adjustment. such adjustment requires changes in an economy ’ s structure, and, as i have argued, membership in a monetary union can encourage those changes. iii. conclusions i have argued that ways of thinking about monetary union have evolved considerably from the early days of the literature on optimum currency areas. developments in modern macroeconomics recast the goals of monetary policy. the focus nowadays on price stability and the creation of the conditions necessary to support growth and employment changes the balance of the arguments about the cost of giving up an independent monetary policy. provided that the monetary policy framework at the union level delivers price stability, there is little to be lost from transferring monetary policy to the union level. the success of the euro area has demonstrated that one size can fit all. let me briefly mention three pieces of evidence which support this. first, inflation dispersion has declined and has been around 1 percentage point since the second half of 1999. this compares favourable with inflation dispersion across a monetary union of similar size, the us. second, the decline in inflation dispersion has not been at the expense of higher growth dispersion. growth dispersion has remained close to its historical average of around 2 percentage points and, if any trend is discernable, it is a downward one. finally, business cycles appear to have become more correlated. the evidence from almost 10 years of monetary union in europe points to a euro area which is endogenously adapting itself to become an optimum currency area. the euro area provides clear evidence that the criteria identified in the earlier literature do not need to be exogenously in place prior to monetary union. i do not want to leave you with the impression, however, that euro area policy - makers can sit back and relax because all the necessary work has been done. after all, i began this lecture by remarking that the adoption of the euro created new challenges for economic policy. the adoption of the euro was neither the beginning nor the end of an optimum currency area among european countries. the process is ongoing, and much more needs to be done, especially in regard to structural policies, to ensure that the euro area becomes a more dynamic force for growth in the global economy. it is my view that the experience of the euro area to date only serves to highlight the fact that a currency union

##tive efficiency and accelerating the transfer of knowledge. the euro area ’ s experience indicates that the euro has indeed acted as a catalyst for trade integration. intra - euro area trade in goods increased from 26 % of euro area gdp in 1998 to 33 % in 2006. intra - area trade in services has also risen. recent empirical work has shown that similar increases in trade have not taken place among european countries which did not adopt the euro. kenen ( 1969 ) emphasised product diversification, the idea being that countries which were more diversified or less specialised in production would be less likely to face asymmetric shocks. indeed, before the formation of european monetary union, there was considerable worry that monetary union would cause national economies to become more specialised as production became concentrated to reap the benefits of scale and agglomeration economies. whilst there is perhaps little evidence that the advent of monetary union has caused economies to become even more diversified, there is no evidence that they have become more specialised, thus allaying these early fears. another contribution to optimum - currency area literature, again made by peter kenen in 1969, brought out the importance of establishing a fiscal transfer mechanism at the supranational level in order to help stabilise economies hit by asymmetric shocks. while such a centralised fiscal mechanism is extremely limited in europe, the stability and growth pact with its emphasis on budgets being either in balance or surplus over the economic cycle is designed to ensure that national budget have the flexibility to react to adverse asymmetric shocks. in sum, the creation of the euro may itself be contributing to the very conditions that make the use of nominal exchange - rate adjustments among the members of the euro area less necessary than was the case before they joined the euro area. nevertheless, it can be argued that a country surely must give up something if it no longer has the exchange - rate tool. my reaction to this argument is that adjustment of the nominal exchange - rate is not a magic bullet. one should not expect an economy with competitiveness problems, running, say, current account deficits equal to 6 per cent of gdp, to depreciate the nominal exchange rate and become competitive for - ever - after. we tried this policy in greece in the 1980s ; and wound up with higher inflation, undiminished current - account deficits, and a currency that became prone to speculative attacks. by its very nature, the current account is the result of intertemporal decisions with respect to