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Economic divergence in the Euro area - why we should be concerned
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Economic divergence in the Euro area - why we should be concerned

28 Seiten · 4,19 EUR
(11. Januar 2008)

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After more than eight years of experience with the euro there are growing concerns about divergent patterns of development among the member states of the Euro area and how monetary policy should deal with them (see e.g. Commission of the European Communities 2006). Divergence pertains to various macroeconomic indicators, mainly growth rates, inflation, labour costs and trade balances. Before the European Monetary Union (EMU) was established there had also been divergent performances between the European Union (EU) member states, and also within the former European Monetary System (EMS). But the then existing adjustment mechanisms, mainly exchange rate realignments and national monetary policy, are no longer available. Divergence in a monetary union is, of course, not a problem per se as it may reflect acceptable or welcomed diversity, such as catching-up of less advanced economies which leads in the long run to overall convergence. But there are forms of ?negative? divergence which hamper growth in the EMU and do not serve long-run convergence. Such divergent performances without appropriate policy responses or adjustment mechanisms can contribute to macroeconomic underperformance of the Euro zone and can lower the effectiveness of the common monetary policy, and the latter might even set false incentives for the members. Hence, for the social and political cohesion of a monetary, even more so for a political union, it may be harmful for the whole and may pose a problem for the governance of the EMU and the EU.

Looking at aggregate macroeconomic indicators for the whole area may be deceptive as they suggest an elusive average which results from deviations in both directions. In the worst case, the overall performance might look satisfactory, but a disaggregated look may divulge a poor performance of all members which tend to offset each other. Monetary policy might be too restrictive for some member states and too loose for others ? one size would fit none (Enderlein 2005). If such problems exist and are indeed relevant, then the question arises as to what policy changes are necessary. This concerns not only monetary policy, but also the common rules for fiscal policy in the EMU as set by the Stability and Growth Pact (SGP).

In the following, I first review the empirics of divergent macroeconomic developments within the EMU since 1999. Then I attempt to identify the problems and their prospective impact on the functioning of the EMU, including the questions as to what type of divergence is harmful for the EMU or how much divergent development is tenable. Finally, different approaches that mitigate or resolve the problems are discussed.

zitierfähiger Aufsatz aus ...
European Integration in Crisis
Eckhard Hein, Jan Priewe, Achim Truger (eds.):
European Integration in Crisis
the author
Prof. Dr. Jan Priewe
Jan Priewe

geb. 1949, war bis 2014 Professor für Volkswirtschaftslehre an der Hochschule für Technik und Wirtschaft Berlin. Seit 2015 ist er Senior Research Fellow am Institut für Makroökonomie und Konjunkturforschung (IMK) in Düsseldorf.

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