There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB – Lucas Papademos – has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.
“In a speech at an ECB conference in Frankfurt, Mr Papademos argued that economic growth and inflation differentials within the eurozone since the introduction of the euro had been similar to regional variation in the US.
But Mr Papademos observed “significant and persistent divergences in measures of competitiveness between member countries”. The extent and cumulative effects of such differences “raise concerns about their impact on growth”. He said “the persistence of these developments suggests that the adjustment mechanisms are functioning slowly”.
Eurozone divergences were “fundamentally” the result of structural factors,” Mr Papademos argued.
Although the ECB vice-president did not mention countries, Italy’s plunge into recession this year is widely blamed on its loss of competitiveness and inability, as in the past, to use devaluation as an escape route. Luigi Buttiglione at Rubicon Fund Management said Mr Papademos’s remarks would fuel “some doubts about the sustainability of monetary union”.
Mr Papademos said that at the time of the single currency’s launch observers saw it as a “reform whip” to encourage competition, productivity and market flexibility. But a paper to be presented on Friday at the ECB conference suggests the opposite.
Romain Duval and Jorgen Elmeskov, economists at the Organisation for Economic Co-operation and Development, say “the absence of monetary policy autonomy seems to be associated with lower structural reform activity in large, more closed economies”.
Stephen Nickell, a member of the Bank of England monetary policy committee, added that empirical results pointed to the “rather depressing conclusion that one of the effects of economic and monetary union is to weaken the incentives for structural reform in the larger member countries”. “
The entire speech can be found here. It is clear that the emphasis is on the need to force through the structural reforms, nevertheless the admissions are significant.