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OECD Economic Surveys: Euro Area 2006

image of OECD Economic Surveys: Euro Area 2006

OECD's periodic review of the euro area economy. This edition examines whether the recovery is sustainable. Its chapters cover managing diversity, monetary policy and fiscal policy.

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Managing diversity

The euro area encompasses a diverse group of economies. Some are among the wealthiest in the world, others are behind in terms of living standards. Some are booming, others have been weathering a long slump. Some sectors are flexible and quick to adapt to changes in the global economy, others remain rule-bound and rigid. Managing such diversity is a challenge. Adopting the single currency has brought considerable benefits to the euro area’s members by ensuring macroeconomic stability, boosting trade and deepening economic integration. Despite stark divergences in economic performance, price levels in member countries are converging on average rather than diverging. However, these divergences mean that a common monetary policy will not suit all countries all the time. The members face different shocks and respond to them in diverse ways. The solution is to undertake structural reforms to make economies more flexible and resilient. These include making wages more responsive to local economic conditions, boosting employment flexibility and labour mobility, reducing the stickiness of inflation by enhancing competition, and creating an efficient, pan-European financial market. The more flexible and integrated product, labour and financial markets become, the smoother the ride inside the monetary union will be. These reforms will not only promote faster adjustment to shocks, they will help overcome the main problem that many euro area countries face: slow potential growth.

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