Mr Duisenberg discusses the challenges posed by economic divergences in the euro area: the consequences for economic policies  Speech delivered by Dr Willem F Duisenberg, President of the European Central Bank, at ‘Nieuwspoort’ in The Hague, Netherlands, on 5 November 1999. *  *  *  First, let me thank you for this rather special calendar for the year 2000. As you are undoubtedly aware, the President of the ECB has a very full schedule, not least in explaining the role of the Eurosystem and communicating its decisions to the general public (through the media). It is therefore a very suitable gift. It is also, however, if I may say so, a very symbolic gift. Next year marks the start of a new millennium. The introduction of the euro also marks the beginning of an important and historic step forward in European integration. The introduction of the euro poses some new questions and challenges for the ECB and other economic policymakers in the euro area, and I would like to take this opportunity to deal with one particular issue which has been raised on a number of occasions in the past year - also here in the Netherlands - that is the challenges posed by economic divergences across regions or countries within the euro area. The single monetary policy and economic conditions in the euro area as a whole The primary objective of the single monetary policy is to maintain price stability.
There is a relatively high degree of correlation in the cyclical developments of euro area countries over a longer time period, and recent differences in growth rates have not been particularly unusual. Nevertheless, different cyclical positions may lead to variations in price pressures. Longer-term factors leading to national differences Turning to the longer-term factors, the trend rate of growth may be higher in some countries due to the process of “catching-up” in terms of productivity and living standards with other euro area countries. It is likely that this has been happening in some euro area countries over the past few decades. In others, the trend rate of growth may be higher due to the fact that the economy is at a more advanced state of liberalisation and deregulation. In terms of the current differences in inflation rates across euro area Member States, longer-term factors are important. It may first be noted that even if inflation rates for all individual goods were identical across countries, the overall rate of increase in consumer prices would differ because there are differences in tastes and preferences across countries and therefore the bundle of goods consumed, and thus the weights of the various goods in the overall price index, differs from country to country. This can also, of course, have consequences for short-term divergences in inflation rates across euro area countries. The “catching-up” effect for countries whose living standards are rising towards the average euro area level also has consequences for inflation differentials.