The European Central Bank has voiced its strongest concern yet about economic divergence among euro zone countries and indicated that the six-year monetary union was not working as effectively as it had hoped.
The comments by Lucas Papademos, ECB vice-president, highlight fears among policymakers about the underperformance of euro zone members such as recession-hit Italy. They came as clashes between EU leaders in Brussels over the union's budget and failed attempts to agree a constitution overshadowed its structural reform programme.
ECB leaders, while urging politicians to free up labour and other markets, have spent much of this month stressing the benefits of euro membership and dismissing as "absurd" speculation that the euro zone's future had been thrown into doubt by the French and Dutch rejection of the EU Constitution.
In a speech at an ECB conference in Frankfurt, Mr Papademos argued that economic growth and inflation differentials within the euro zone since the introduction of the euro had been similar to regional variation in the US.
But Mr Papademos observed "significant and persistent divergences in measures of competitiveness between member countries". The extent and cumulative effects of such differences "raise concerns about their impact on growth".
He said "the persistence of these developments suggests that the adjustment mechanisms are functioning slowly".
Euro zone divergences were "fundamentally" the result of structural factors, Mr Papademos argued.
Although he did not mention countries, Italy's plunge into recession is blamed on its loss of competitiveness and inability, as in the past, to use devaluation as an escape route. Luigi Buttiglione at Rubicon Fund Management said Mr Papademos's remarks would fuel "some doubts about the sustainability of monetary union".
Mr Papademos said that at the time of the single currency's launch observers saw it as a "reform whip" to encourage competition, productivity and market flexibility.
But a paper to be presented today at the ECB conference suggests the opposite.
