Heterogeneity in the euro area and the United States:

• Some may argue that the US economy may be more homogeneous than the economy of the euro area. In other words, aggregate economic data may hide the variance in economic performance across regions within a monetary union. Looking more closely at the regional dispersion across US regions and euro area economies suggests otherwise. In fact, the dispersion of many of the key indicators is similar.

• Trichet started off with the inflation indicator. Before the crisis, the dispersion of HICP inflation in euro area countries had remained broadly stable since the late 1990s, at a level similar to the 14 US Metropolitan Statistical Areas. During the crisis we saw a temporary increase in inflation dispersion in the euro area but this has been reversed over the past 12 months.

•  Going one step further, investigation of the sources of this growth dispersion in the US and euro area economies reveals parallels even in the root causes of dispersion in economic performance. Both currency areas comprise regions that experienced a significant boom and bust cycle over the past decade. Both also contain regions that are facing significant structural challenges of a more long-term nature.

• In the United States, for example, Nevada, Arizona, Florida and California experienced increases in house prices that outpaced the national average by a wide margin. The steep house price increases probably contributed to above average growth in these states, owing to strong positive contributions from real estate, construction and financial services. These sectors all saw their share in terms of value added to GDP increase at the national level during the years of the housing boom.

• But at the same time, some US states, particularly the former manufacturing powerhouses in the ''Great Lakes'' region, have seen a long episode of below average growth. Below average performance of the region – and particularly weaker growth rates in the states of Michigan and Ohio – are related to strong reliance on manufacturing. Structural shifts in the US economy towards services have gradually reduced the value added of manufacturing relative to GDP, with implications for areas with a high concentration of companies in manufacturing industries other than information and communications technology.

• The sharp fall in house prices in Florida and the south-western US states turned boom into bust. These states experienced the harshest recession among the US states.

• Similarly, in the euro area some countries experienced asymmetric boom and bust cycles. Several euro area countries had higher than average growth in the pre-crisis years. In Ireland and Spain particularly, a large part of this growth can be ascribed to increases in housing prices.

• Other countries in Europe – Portugal, for example – have experienced growth persistently below the euro area average for the past decade, due to structural issues that could have been tackled with more determination.

•  Just a few years ago, this group of countries included Germany – then labelled, totally wrongly, the “sick man of Europe”. Yet Germany is now an example of how big the dividends of reform can be if structural adjustment is made a strategic priority and implemented with sufficient patience.

• The effect of the crisis on the different euro area economies follows a similar pattern to those of comparable US states. The countries in the euro area that have been hit hardest are those in which either large asset-bubble driven imbalances unwound or structural problems were left unaddressed before the crisis. More specifically, Ireland and Greece, in particular, remained in recession in 2010.

• Those countries that have yet to implement more far reaching structural reforms also have relatively low growth prospects after the crisis.

• These relatively low growth rates are linked to a deterioration of competitiveness, driven, for example, by persistent above average unit labour costs.

• Ahead of EMU, unit labour costs converged in the euro area. What is more – disregarding the most recent countries to join the euro area – dispersion both ahead of the crisis and during the crisis was very similar in the euro area and the United States.

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