This study and other recent research show that European financial integration has resulted in increasing opportunities to share risk. The paper by Ignazio Angeloni, Luc Aucremanne and Matteo Ciccarelli concentrates on determinants of inflation dynamics in different euro area countries, notably the evidence on the price-setting behaviour of firms and on factors explaining inflation persistence. A thorough analysis of aggregate inflation dynamics and of the inertia characterising core inflation is of direct relevance to the formulation of monetary policy and also contributes to the diagnosis of the causes of growth fluctuations and of the high unemployment in Europe. One general conclusion that emerges from the papers prepared for this workshop is that the divergences observed in the euro area are fundamentally the consequence of structural and not of conjunctural factors – even if current divergences may also have been influenced to a certain extent by conjunctural events. The policy implication of this general diagnosis is that more economic reforms are needed to address the structural impediments to growth and the causes of growth and inflation divergences. Of course, structural reforms are not always easy to implement, they may be politically costly, and their positive effects may not be immediately visible – which makes it difficult to communicate them and convince the public at large about their benefits. Nevertheless, only the implementation of appropriate economic reforms can address effectively and permanently the root causes of the euro area’s economic problems.
One could expect that easing regulations and fostering competition would lead to higher labour productivity growth in the industries concerned, as has happened, for example, in the telecommunications sector. Yet, over the past decade the euro area as a whole has experienced a decline in trend labour productivity growth. A number of other effects of integration on trade should also be looked at: for instance, whether labour regulations and taxation that hamper technological innovation could lead to a decline in exports within the euro area, as well as resulting in lower exports from the euro area to the rest of the world. As regards the latter effect, it appears that the product composition of euro area exports might involve risks for the future export performance of the euro area, if the under-specialisation in fast-growing high-tech sectors is not adequately addressed. Richard Baldwin’s paper offers a very useful and comprehensive treatment of the issues related to the euro’s trade effects. And what he found – or did not find – should certainly provide fertile ground for a fruitful discussion in the first session. Inflation and growth divergences in the euro area and policy implications The existence of divergences in growth rates and inflation in the euro area, and the associated challenges posed for economic policy in general, and the single monetary policy in particular, are issues that have been debated extensively and intensively since the creation of the euro.