The euro zone’s growing heterogeneity is consistent with the theory, and poses a major problem

Trends in productivity gains, the size of industry or tourism, private sector debt, cost competitiveness and income level show the euro zone’s growing heterogeneity. Paul Krugman (1) had warned us: after the creation of a currency area, the disappearance of exchange-rate risk enables countries to use their comparative advantages; they then specialise differently, which explains the increase in heterogeneity. Even if fiscal policies had more freedom and could be more expansionary in the lower-growth countries, structural heterogeneity could not be permanently corrected. Even if there were a large federal budget, it would correct only a fraction of the heterogeneity. We will therefore have to get used to the growing heterogeneity of euro-zone countries and the growing dispersion of their economic characteristics. P. Krugman, Lessons of Massachusetts for EMU in F. Torres, F. Giavazzi “Adjustment and growth in the European Monetary Union” Cambridge University Press, 1993