Whether such divergences create problems for the performance and functioning of a monetary union depends on their causes, size and persistence. What are the facts about the relative macroeconomic performances of euro area member countries? And what is the diagnosis about the causal factors and the underlying processes that explain them? I would like to point out two interesting facts that are contrary to popular perceptions. The first is that during the first six years since the creation of the euro, the growth and inflation differentials observed between member countries have not been greater than those recorded in the 25 years before the establishment of EMU. On the contrary, according to some measures, the dispersion in growth rates has recently reached a historically low level. The second fact is that both growth and inflation differentials in the euro area since the introduction of the euro have been broadly of the same order of magnitude as the corresponding differentials observed across regions and metropolitan areas in the United States. These facts would seem to suggest that, at least on the basis of size, the heterogeneity  2  BIS Review 46/2005  observed in the macroeconomic performance of euro area member countries is not exceptional and thus need not be a cause of alarm. Nevertheless, there are certain other developments that suggest caution and point to the need for a deeper and more comprehensive analysis. One such development relates to the significant and persistent divergences in measures of competitiveness between member countries.
Correlation analysis suggests that, while short-term fluctuations in nominal as well as index-linked bond yields tend to be quite closely synchronised between the euro area and the US, the relationship between euro area and US break-even inflation rates tends to be very weak (see Chart 8). Only in times when inflation expectations react to common global inflationary shocks, for example to strong increases in oil prices, can a closer synchronisation of movements in break-even inflation rates be observed. How would the European economy have developed had the euro not been introduced? We can only speculate, but past experience can be quite instructive. We must not forget that, as a consequence of the collapse of the Bretton Woods system and the world’s first major oil crisis, the 1970s were a period of monetary disintegration in Europe. Nor should we forget the devaluation of the Italian lira by almost 30% against the Deutsche Mark after the 1992 ERM crises. The exchange rate risk premium, which is  BIS Review 43/2006  7  believed to have been a major determinant of interest rates before the introduction of the euro, would have increased the spreads on government bond yields across Member States with adverse effects on countries with large debt ratios. 14 In all likelihood, therefore, a currency crisis in Europe may well have arisen, with speculative attacks on weaker currencies leading to large devaluations.