EZA 823 Report

04 December 2007

EMU weathers asymmetric euro strength by “asymmetric adjustment”



With the euro at new historic highs, monetary conditions have tightened significantly for the euro area.
But so far there are little signs of asymmetric effects for countries with a surplus like Germany on the one hand and the deficit economies France and Italy on the other.
While euro area economies continue to diverge in terms of unit labour costs, Italian exporters have started to adjust to euro strength through their focus on capital goods.
The same is true for export markets, as Italian exporters (while maintaining their key focus on the euro area) have moved into emerging growth markets.
EMU seems better positioned to weather euro strength without increasing strains between its economies than in previous episodes.


Asset conclusions: growing EMU coherence facilitates consistent interest rate setting; makes emergency rate cuts less likely than in 2001.