The Euro and Economic Stability
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The Euro and Economic Stability

Focus on Central, Eastern and South-Eastern Europe

Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald

The Euro and Economic Stability assesses the euro area’s merits as a shelter and the merits of euro assets as a safe haven and reviews the case for rapid euro adoption from a post-crisis view. Policymakers and economists provide relevant lessons from euro area divergences for future euro area members and, more generally, from the financial crisis, while banking representatives discuss post-crisis business models of banks in the area. Last but not least, a theoretical introductory chapter fills the gap between mainstream macroeconomic modelling and real-world decision-making.
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Chapter 12: Facts and Lessons from Euro Area Divergences for Enlargement

Zsolt Darvas


1 Zsolt Darvas FACTS 1. Regarding the magnitude of divergence across euro area countries, and also temporal convergence/divergence of various indicators, euro area diversity is by and large similar to regional diversity in some sovereign countries, such as Australia, Canada, Japan, Poland, the UK and the US. There are examples of successful economic catching up inside the euro area, but also of highly disappointing economic performances. Booms that are characterized by a surge in credit, housing prices, construction and indebtedness are dangerous both in the run-up period to monetary union and inside. The rise in manufacturing unit labour costs (ULC) is not inevitable during housing, construction and credit booms and structural features matter. Regaining competitiveness via the so-called ‘competitiveness channel’ is a long-lasting and difficult process. Crisis response: the euro is a shelter. 2. 3. 4. 5. 6. LESSONS 1. Fiscal policy, income policy, and bank regulation and supervision should aim to dampen huge housing and credit booms, that is, act in a counter-cyclical manner. Measures improving the flexibility of product and labour markets should be implemented. Efficient and transparent crisis management tools are needed. Enhanced surveillance is needed. Enhanced policy coordination is needed. 2. 3. 4. 5. 145 M2386 - NOWOTNY PRINT.indd 145 23/9/10 14:27:15 146 The euro and economic stability 6. Euro area entry criteria are inadequate for judging the achievement of ‘high degree of sustainable convergence’, which they aim to assess. 12.1 INTRODUCTION The tenth anniversary of the introduction of the euro in 2009 was...

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