fact that, in a number of high - interest - rate countries, the real rate of interest fell even more sharply than the nominal interest rate. however, in a monetary union there are also forces that work towards a reduction of cyclical divergences. for instance, it is to be expected that a " shock - induced " acceleration of price rises will lessen the competitiveness of the economy in question, and thus trigger an adjustment process that ultimately reduces the growth advantage. asymmetrical shocks are not the only potential cause of cyclical divergences in a monetary union. differences in growth and inflation rates may also be due to divergences in the responses of individual economies to cross - country shocks. an example of that is provided by the differing degrees to which the member states of the monetary union were affected last year by the dramatic upturn in oil prices and the weakness of the euro. some of the inflation differential related to this shock is undoubtedly attributable to differences in trading patterns and in energy consumption. for instance, the share of this argument can be traced back to sir alan walters. see favero, c. et al. ( 2000 ) : one money, many countries, monitoring the european central bank, 2, cepr, london, p. 3. imports from non - euro - area countries varies between less than 10 % of gdp in italy, france and spain, via nearly 12 % in germany, to almost 40 % in ireland. divergent economic policy responses to the oil - price rises in individual countries may – in themselves – have actually enhanced the inflation differentials. whether the economic structures of the countries participating in emu will converge in the longer run or whether monetary union will tend to exacerbate existing differences, is difficult to say. sceptics point out that the integration process in europe has been accompanied by increasing specialisation on the part of individual countries. that has meant that the differences in production patterns have tended to increase. advocates of the " convergence hypothesis " argue, notwithstanding that assertion, that monetary union enhances competition between the participating economies. that obliges national governments to adjust the institutional rules of their tax and social security systems, and of the goods, labour and financial markets. on the whole, emu has already led to a rapprochement of financial market structures in the participating countries. mention should be made in this context of the creation of an emu - wide money market, of the rapid growth of

average, respectively. moreover, it is to be kept in mind that, in the member states of emu, there are wage differentials between the non - tradable and the tradable goods sector. they may well weaken the balassa - samuelson correlation. after all, it is not impossible that countries in the process of catching up make greater productivity gains than hitherto, not only in the tradable goods sector but also in the non - tradable goods sector, because, for instance, they are pursuing a systematic policy of opening up and deregulating markets. that, too, would qualify the balassa - samuelson effect. a simple and hypothetical back - of - the - envelope calculation shows that an inflation differential of two percentage points between the three catching - up candidates greece, portugal and spain and all other member countries would raise the emu - wide inflation rate by 0. 3 percentage point. to prevent an overshooting of the ecb stability standard, average inflation in the other member states would have to be kept at a maximum of 1. 7 %. all in all, differences in inflation rates, which are likely to persist for some time, should not be a reason for the ecb to revise its definition of price stability upwards. in the first place, the ceiling of just under 2 % provides sufficient leeway for a certain balassa - samuelson effect. secondly, the main reason why a redefinition of the stability standard should not be contemplated is that an increase might adversely affect the credibility of monetary policy in emu. for the rest, it is to be expected that the divergences in inflation rates due to catching up will diminish because a large part of the catching - up process is in the past. the monetary policy of the eurosystem is geared to safeguarding price stability in the euro area as a whole. hence it is neither required nor able to influence growth and inflation differences within the monetary union. if economic problems arise from catching - up processes and cyclical divergences, that presents a challenge, rather, to national economic policy - makers. in such cases, not only structural and wage policy but also fiscal policy must be brought into play. some observers think that the european stability and growth pact might exacerbate cyclical divergences because it hampers unduly the stabilising role played by national fiscal policy. this argument fails to take sufficient account of the fact