Is There a World Business Cycle?

In 1999, the year the euro zone was officially launched, the European Central Bank (ECB) had to fashion a single policy for a diverse region where the growth rates of gross domestic product (GDP) ranged from 10.8% in Ireland to 1.6% in Italy. At the time, many commentators questioned the viability of the ECB since its one-size-fits-all monetary policy would likely have negative consequences for part of the zone and positive consequences for the rest. Three years later the economies of the euro zone are finally starting to move in step, with the forecast differential between high- and low-growth countries narrowing to half of that recorded in 1999. The good news is that this convergence should make it a lot easier for the ECB to formulate a single monetary policy for the region. The bad news is that the euro zone is heading in the wrong direction, with output growth forecast to slow for all countries in the region this year.