their causes and nature given their potential implications for future economic performance. a first significant finding of empirical analysis is that the dispersion of growth rates across the euro area can largely be explained by differences in trend output growth – reflecting structural factors such as the effects of reforms recently implemented – rather than different cyclical developments. to the extent that such differences in trend output growth are related to normal and positive catching - up processes in the economies of some countries or are the consequence of persistent idiosyncratic shocks, they are not a cause for concern per se and need not have longer - term detrimental effects on inflation, economic activity and job creation. on the contrary, they may be seen as a manifestation of a desirable equilibrating mechanism, contributing to sustainable convergence among euro area countries. a second salient feature of the divergence observed in economic performance across the euro area countries is its persistence. very often the same set of countries are characterised by developments in key economic variables that are systematically either above or below the euro area average. this may suggest that the underlying adjustment mechanisms in the euro area economies are not functioning as smoothly or swiftly as they should. if the persistence of higher than average inflation and stronger than average unit labour cost growth reflects structural rigidities in a country ’ s economy and the implementation of inappropriate policies, this is a matter of concern because of the likely adverse effects on competitiveness, longterm growth and employment creation. iii. iii necessary conditions and appropriate policies for the efficient functioning of monetary union to optimise the economic performance of monetary union, to fully reap its potential benefits in terms of economic dynamism and welfare, job creation and increased per capita income, it is crucial to improve the functioning of product, labour and financial markets. to this end, well - designed and effectively implemented structural reforms and sound fiscal policies are essential in all euro area countries. since monetary policy and the exchange rate are no longer available at the national level as policy instruments and a means of adjusting to specific shocks and the challenges posed by globalisation, other adjustment mechanisms become even more important. at the beginning of the 1990s the level of dispersion of inflation rates across the euro area countries was, on average, around 6 percentage points ( standard deviation measured in unweighted terms ). in 2006 inflation dispersion was only 0. 7 percentage point. this implies that dispersion in the euro area is currently broadly in line with inflation dispersion among the key 14 us metropolitan statistical

emerging economies. finally, i ’ ll explore some of the policy implications. 2. key concepts in global liquidity the landau report of the cgfs has pointed out that global liquidity has two separate, but interdependent, components. the first component can be labelled as “ official liquidity ”, and can be defined as “ the funding that is unconditionally available to settle claims through monetary authorities ” 2. official liquidity can be generated through various instruments. central banks can create it in their domestic currency through regular monetary operations or see borio and zhu, 2008, “ capital regulation, risk - taking and monetary policy : a missing link in the transmission mechanism? ”, bis wp no. 268. cgfs paper no 45 : “ global liquidity – concept, measurement and policy implications ”, basel, 2011. bis central bankers ’ speeches through emergency liquidity assistance. in addition, authorities can provide official liquidity in foreign currency by selling foreign exchange reserves and through swap lines between central banks. the other component is private ( or private sector ) liquidity. private liquidity is created to a large degree through cross - border operations of banks and other financial institutions, and increasingly within the shadow banking system. in normal times, private liquidity dominates official liquidity. but private liquidity is highly procyclical and highly endogenous to the conditions that prevail in the global financial system. the inherent endogeneity of private liquidity means that it can easily evaporate in times of financial stress. the pro - cyclicality is documented via the strong interaction of private liquidity and the global risk appetite of financial institutions. indeed, the global risk appetite is one of the main determinants of the multiplier that links levels of overall liquidity to levels of official liquidity. consequently, while only central banks can create official liquidity ( the imf can only mobilise it and reallocate it across countries ), for global liquidity cycles to emerge there is no need for new injections of official liquidity. what is needed is that private or official investors reallocate existing liquidity to other market segments. and when viewed in this light, the true driver of liquidity is the underlying set of factors that allows this portfolio reallocation to take place. let me explain. 3. relationship between liquidity and recent crises a glance at the history of global capital flows over the last 20 years suggests that the