On the one hand, further integration of labour, product and capital markets can be expected to reduce economic heterogeneity within the euro area. On the other hand, some degree of heterogeneity can be expected to remain and, indeed, it can be considered a natural feature of any monetary union. These propositions raise several important questions, for example: •  What kind of convergence processes has EMU set in motion? •  To what extent has EMU-induced convergence moderated economic heterogeneity within the euro area? •  What are the causes and consequences of sometimes sizeable and in some cases persistent inflation and output growth divergences across different euro area countries, in a macroeconomic environment shaped by the ECB’s monetary policy, which aims to preserve price stability for the euro area as a whole? These questions, which will be addressed in this workshop, relate to diverse but interrelated issues, such as trade integration, business cycle synchronisation, financial integration, structural reforms in product and labour markets, as well as inflation persistence and inflation differentials. I believe that the quality of the papers to be presented and the impressive group of discussants, chairpersons and panellists will contribute to fruitful debates. Looking at the titles of the various sessions of the workshop, I would like to share some thoughts with you on three specific topics. The first relates to the consequences of market integration for trade. The second, “closer to home” for a central banker, concerns inflation and output divergences across euro area countries and their implications for policy.
The third pertains to the role of the euro in fostering reforms in product, labour and financial markets. The implications of the integration of goods, services and financial markets for trade The first topic – the effects of market integration on trade – is particularly interesting, as it raises a number of issues which sometimes seem to lead to puzzling results. First, the conclusions about what we should expect as the trade effects of deeper integration are, in part, ambiguous – think, for example, of the effects of specialisation. Increased competition achieved by deregulation and the completion of the single market, as well as cross-border price transparency due to the single currency, may foster higher sectoral or industry-specific specialisation. Greater sectoral specialisation, as well as increased financial integration, should lead to increases in trade flows within the euro area. At the  BIS Review 46/2005  1  same time, however, if increased integration were to lead to more similar economic structures and business cycles, this could weaken trade flows within the euro area. But even if the expected effects of integration are not as ambiguous, appearing instead to be rather straightforward, the evidence available thus far seems not to fully conform with the expectations. Take, for example, the significant progress that has been made in the 1990s regarding product market reforms, which had positive effects on the integration and the degree of competition in goods and services markets in the euro area.