jean - claude trichet : economic and financial integration in emu and implications for monetary and economic policies speech by mr jean - claude trichet, president of the european central bank, at the suerf / unicredit conference entitled “ governance and structure of european finance after eu enlargement ”, frankfurt, 9 march 2005. * * * introduction ladies and gentlemen, it is a great pleasure for me to give this keynote speech here today and to welcome you all to frankfurt – the home of the ecb since 1998 and the euro since 1999. while serving the suerf ’ s aim of promoting contacts and discussions on monetary and financial issues, the topic of this conference covers the most crucial, and most rapidly changing, elements of present developments in the eu, namely i ) the evolving composition of the eu and ultimately the euro area, ii ) the prospects for european finance and finally, iii ) issues of governance – and i am looking forward to hearing the results of today ’ s discussions. in 2003, i had the honour of speaking on the occasion of the 40th anniversary of the suerf in paris. i discussed the interplay between the degree of optimality of a currency area and the implementation of economic policies. having made the move from paris to frankfurt shortly after, and having had enough time to appreciate the complex and fascinating mechanisms of emu through another angle, i would like to return to the topic of economic and financial integration in europe and its implications for economic and monetary policies. economic and monetary integration in the euro area political and economic rationale have taken turns in driving the european integration process with the aim of achieving peace, political reconciliation and economic prosperity. this has led to a very advanced stage of economic and financial integration in the eu, with the single market and the single currency as its most visible characteristics. this integration process is historically unique as it combines both supranational and intergovernmental elements between sovereign states in a way that challenges previous concepts and definitions. while integration in europe could be seen partly as a regional process of the much wider global phenomenon of trade integration, visionary political leadership also played its role in accelerating the integration of the product, labour and capital markets. in the field of economics, theory and practical experience gained in the 1970s and 1980s led to a convergence of ideas and greater belief in the virtues of stability - oriented macroeconomic policies. as a result, we see less volatility in market variables such as interest rates and exchange rates. the single currency

2 a series of studies have revealed the similarity of monetary policy transmission channels, with the interest rate channel playing the prominent role in all countries and the bank credit channel a less predominant role. 3 national financial structures, however, still continue to exhibit significant differences. for instance, the role of debt securities and shares in financing the private sector and the types of vehicles ( pension, insurance and mutual funds ) used to manage the long - term savings and pensions of households are markedly different across countries. as a result of the high degree of trade, particularly intra - industry, and financial integration, as well as the high degree of convergence of macroeconomic policies in the euro area, the business cycles tend to be significantly synchronised. cross - correlations of business cycles ( in particular industrial output ) have been quite high between the larger euro area countries4 over the past decade, although business cycles have also tended to be more synchronised across the world. moreover, the dispersion of real gdp growth rates in the euro area has remained very close to its historical average, suggesting the absence of any major asymmetric shocks. as differences in gdp growth rates partly reflect differences in potential growth rates, and consequently differences in the successful implementation of structural reforms, the dispersion also indicates the scope for countries with low growth to achieve higher growth rates. it is important to note that even if there have been no major asymmetric shocks, diverging developments may have arisen from the transmission of common shocks, implying that adjustment mechanisms, working via external competitiveness or automatic fiscal stabilisers, are still necessary. for the new member states, business cycles are less correlated within the group and with the euro area, showing also higher output variability. while this partly reflects the profound structural changes and reforms that have taken place, it may also reflect the fact that these countries are rather small and specialised. as trade integration and foreign direct investment flows into these countries continue, there is reason to believe that the level of synchronisation will increase. as a matter of fact, there has been a marked increase in investment flows towards the 10 new member states in recent years. certainly, the euro area also lacks some properties that would make countries and regions more resistant to economic disturbances and improve performance in terms of gdp growth and employment, in particular a high degree of wage and price flexibility and labour market mobility. some have also argued that the sustainability of emu hinges on the existence of a cross - country fiscal transfer