Bad and good heterogeneity in the euro zone

- "It is well known that heterogeneity between regions (countries in the case of the euro zone) raises problem in a currency area, since the monetary and exchange-rate policy is common."
- "This leads to a desire to limit heterogeneity as much as possible when it is useless, and in particular when it results from economic policy errors: abnormally expansionary fiscal policies, excessive pay rises relative to productivity gains, excess indebtedness and asset price bubbles."
- "However, part of the heterogeneity is a "good" and not a "bad" heterogeneity, i.e. that which results when countries take advantage of their different comparative advantages. So if a country specialises in industry and another in services, the first country will have higher productivity gains and a higher real growth in the long term, which is a problem in a currency area, especially if the degree of federalism is low, due to the divergence of real wages."
- "The issue of the trend in unit wage costs is complicated. Service economies keep an industry; nominal wages in industry converge in a currency area, which leads to a rise in unit wage costs and high inflation in economies primarily based on services if there is wage contagion between industry and services, while this is not an anomaly since it does not reveal a loss of competitiveness in industry. However, the sharper rise in unit costs in industry is an anomaly."

Natixis Flash Economics 377 20100723

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