ulc growth across the euro area countries since the launch of the euro, and then i will draw some conclusions about the appropriate policy response. ii. some facts about divergences in economic performance in the euro area let me start by recalling some facts and presenting some additional evidence about the observed divergences in the economic performance of the euro area countries. a first important observation is that, although inflation and growth differentials between the euro area countries are not insignificant, since the launch of the euro, they have not been unusually large when compared with the corresponding differentials in other large monetary unions, notably the united states ( see slide 3 ). moreover, the dispersion of inflation rates in the euro area since the introduction of the single currency is substantially smaller than that experienced in the previous decade, while the dispersion of the growth rates across the euro area countries has declined somewhat over the past twenty years ( see slide 4 ). there is, however, a third fact which differentiates the observed economic divergences in the euro area from those in the united states : the persistence of the inflation and growth performance across euro area countries. this feature, which is not characteristic of the united states, may suggest that the underlying adjustment mechanisms in the euro area economies are not functioning as smoothly and in a timely manner, with potentially undesirable implications for the dynamics of economic activity and employment. to better understand the causes and consequences of the observed persistence of inflation rates across the euro area, we must look more closely at the inter - temporal and cross - border developments in the underlying determinants of inflation and growth, and in particular ulc and the factors that shape their level and evolution over time. what are the pertinent facts about the evolution and dispersion of ulc in the euro area? on average, unit labour cost in the euro area has increased at a moderate pace in recent years, largely thanks to subdued wage developments in germany. however, unit labour costs have grown at significantly different rates across the euro area countries ( see slide 5 ). the cumulative growth of unit labour cost ( for the total economy ) in euro area countries relative to the euro area average ranged between + 15 % in portugal and - 10 % in germany over the period 1999 - 2006. nevertheless, the dispersion in ulc growth rates across the euro area countries has declined substantially over the last fifteen years ( see slide 6 ). moreover, the size of dispersion, measured in terms

lucas papademos : inflation and competitiveness divergences in the euro area countries : causes, consequences and policy responses speech by mr lucas papademos, vice - president of the european central bank, at the conference “ the ecb and its watchers ix ”, frankfurt am main, 7 september 2007. * i. * * introduction thank you for inviting me to participate in this conference and this panel with the challenging task of addressing issues relating to the inflation and competitiveness performances of the euro area countries. the relative economic performances of euro area countries and the role of national economic policies in a monetary union have been discussed extensively both before and after the launch of the euro for various reasons. a central question is whether and to what extent inflation rates in member states can diverge significantly and persistently from the euro area norms of price stability with undesirable consequences for competitiveness positions and economic growth. a second, related question is how euro area countries can help prevent and / or correct diverging adverse developments in their domestic inflation and international competitiveness when they can no longer deploy monetary policy at a national level or rely on nominal intra - euro area exchange rate adjustments in order to, respectively, control domestic inflation and restore price competitiveness. i will address these two questions by examining the role of unit labour cost ( ulc ) developments in shaping inflation dynamics and competitiveness patterns across the euro area countries ( see slide 2 ). the evolution of unit labour cost is a key determinant of inflation and of changes in competitiveness, as i will show, and this justifies the emphasis placed in the analysis that follows – and which is highlighted in the title of this session. at the same time, i would like to stress from the outset that relative unit labour cost is not the only determinant of competitiveness and due attention must also be given to other determining factors. international competitiveness is a broader concept that reflects both price and nonprice or quality elements that will not be considered here ; moreover, price competitiveness can be measured by several indicators based on hicp, producer prices or relative export prices. nevertheless, the trend growth in relative unit labour costs provides a useful indicator of the change in competitiveness of a country in a monetary union that has the merit that it is unaffected by changes in indirect taxes or asymmetric external shocks to consumer prices. in my presentation, i will examine and assess the facts, the causes and the economic consequences of the observed dispersion in