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Sunday, May 15, 2005

Europe's Diverse Economy

EU finance ministers meeting in Luxemburg have been taking stock of the complications involved in trying to have one monetary policy for twelve different economies. European Central Bank President Jean Claude Trichet described lending rates - which are at a six-decade low - as 'appropriate' and tried to play down finance ministers' concerns about economic the difficulties presented by ongoing divergences in the 12 countries sharing the euro.

"In a huge continental economy with 306 million inhabitants, it's perfectly normal that we should have considerable differences between areas,'' Trichet told a press conference in Luxembourg today following a meeting with European Union finance ministers and central bankers. "Do we ask if policy is appropriate for Texas, California or Alaska?"
Source: Bloomberg

I think Trichet misses the point here. Texas, California and Alaska all form part of one single Federal state, the euroland 12 are different nation states, with all the differences that this implies. Texas, California and Alaska would be better compared with German Lander for these purposes.

Actually behind the scenes - as the FT suggests - the failure of the eurozone 12 to really converge is begining to cause concern, despite Trichet's best efforts to brush the problems aside (he would, as they say, wouldn't he: it's his job to do so).

"The European Central Bank has voiced growing concern about the persistence of economic divergences among eurozone countries and urged urgent structural reform in underperforming countries.

Its comments, coming on the day data showed Italy in recession, mark a change of tone for the ECB, which has previously shied away from discussing individual countries' performances.

The bank, in its monthly bulletin released on Thursday, acknowledged that variations in economic growth and inflation rates among the 12 eurozone countries persisted, in spite of the introduction in 1999 of the single currency and a single interest rate. However, the ECB denied that divergences had worsened since then and said its job had not been made more difficult by the weakness of several eurozone countries.
Source: Financial Times

The above mentioned ECB monthly bulletin - which is indeed a weighty document - can be found here. Those with nothing better to do on a nice sunny day might enjoy the read :). In all seriousness though, this problem isn't going to go away. Both Germany and Italy now have trend growth which hovers between + and - 0.5%, and in a world of fiscal containment it is not clear what can be done to change this.

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