##ness and reached rather low levels of unemployment. for such economies inflation above the euro area average may be the natural way to adust towards a more normal price level in line with the average. this problem had been observed, for instance, in the case of the netherlands and is possibly still relevant for ireland. third, inflation differentials are not only the necessary means of achieving relative price adjustments within the euro area, as in the case of germany, they are also a natural feature of some economies in the euro area in view of their gradual convergence and catching - up process with regard to the average european gdp per capita. real growth differentials may be welcome if they reflect such a healthy catching - up process on the part of less advanced economies. indeed, since the mid - 1990s, most of the countries which previously had gdp per capita levels significantly below the euro area average have experienced above - average real gdp growth rates. this is particularly true for ireland, spain and greece. a healthy catching - up process is not a zero sum game, it is a win - win situation, as those countries which are already more productive can benefit from increased trade and investment opportunities. crucially, emu increases the chances of achieving such a welcome outcome. a credible monetary policy anchors inflation expectations and increases market transparency, thereby facilitating the necessary adjustment of relative prices across different countries or sectors in the presence of economic shocks. in addition to the positive effects of monetary stability, a single currency enhances the processes of financial and trade integration within the euro area. and we have also observed increased risk - sharing between euro area countries. thus, the euro and the single monetary policy contribute not only to the competitiveness of the euro area and to job creation, but also to real convergence. cross - country differences may also signal the need for changes in national economic policies i have just given three economic reasons why cross - country differentials in price and labour cost changes reflect welcome adjustments in relative prices within a single currency area. however, there is one case in which such differentials are not advisable in terms of national economic policies : this is when an economy with an already relatively low level of cost competitiveness and high unemployment faces further deterioration on account of higher price and cost inflation. in that case, additional attention must be given to increasing the flexibility and adaptability of the institutions and market structures in the national economy concerned in order to allow the appropriate adjustment mechanism to function, and to redress the relative deterioration of cost competitiveness.

jean - claude trichet : monetary policy in emu - views and challenges speech by mr jean - claude trichet, president of the european central bank, at the zentrum fur europaische wirtschaftsforschung ( zew ), mannheim, 24 june 2005. * * * introduction the subject which the organisers have chosen for this conference, namely “ competition in europe europe facing international competition ” is not only very topical, but also very challenging. while my presentation today will not focus directly on these issues, i will address them both in my discussion of economic differentials within the euro area and in my concluding remarks. my main message today is that economic and monetary union ( emu ) is beneficial to all of the individual countries which comprise the euro area. i will begin by presenting some key macroeconomic developments which show the great success of the emu project, not only in terms of price stability and low inflation expectations, but also with respect to the low macroeconomic volatility in the euro area. i will argue that a high degree of credibility, transparency and predictability on the part of monetary policy are key conditions for this success. nevertheless, it is not the stability - oriented monetary policy of the ecb alone that has made the success of the euro possible. during the transition to the euro fiscal policies have been more disciplined than before. moreover, some structural reforms have been implemented and social partners have contributed via wage moderation. one should not overlook these contributions to macroeconomic stability and job creation simply because their positive effects have been diminished by uncertainties and hesitation regarding further reform projects and fiscal policy soundness. major adverse supply shocks in recent years have also to be taken into account. finally, i will discuss the issue of inflation and growth differentials within the euro area. i will explain that these divergences are of a similar size to those observed within the united states. moreover, inflation differentials are often a normal and welcome equilibrating mechanism within a large currency area. similarly, persistent real growth differentials may reflect a normal and healthy catching - up process. however, they may also be caused by cross - country differences in economic structures and in the design of economic policies. the first years of the euro - price stability and well - anchored inflation expectations … when taking a closer look at those developments that can be influenced by monetary policy, there can be little doubt that the emu project has been a great success, which is particularly remarkable against the background of