EXECUTIVE SUMMARY

Economic integration as experienced by
European Union (EU) countries since the 1980s
is thought to have the potential to result in
important changes in the sectoral composition
and thereby the macroeconomic dynamics of
Member States. The aim of this report, which
has been prepared by an ad hoc Task Force on
Sectoral Specialisation of the Monetary Policy
Committee of the European System of Central
Banks (ESCB), is to review the main stylised
facts concerning sectoral specialisation in EU
countries and the changes that have occurred.
The report assesses these developments from
the point of view of their likely impact on the
macroeconomy and their relevance for monetary
policy.

Sectoral composition and changes in the
economic structure are relevant for monetary
policy for at least three reasons. Firstly,
sectoral specialisation may have consequences
for the transmission of monetary policy and
other macroeconomic shocks. Second, sectoral
specialisation may contribute to inflation
developments, as different sectors may be
characterised by different price dynamics.
Finally, sectoral composition may shape
potential growth and business cycle
developments, thereby indirectly affecting
inflationary pressures. This report analyses
trends in sectoral specialisation observed over
recent decades, with a particular emphasis on
aspects related to the last channel mentioned
above. This report also tries to assess whether
the features of and changes in sectoral
composition have significantly affected the
conditions under which monetary policy
operates in the euro area. In contrast, it is still
too early to detect whether Economic and
Monetary Union (EMU) has had any potential
impact on the production structures of euro area
countries. However, care must be taken when
interpreting the results since changes might
have taken place that would only be discernible
when looking at finer definitions of sectors than
those considered in this report.

The report draws the following conclusions:

- There are some indications that there are
relatively few cross-country differences in
sectoral specialisation in the EU and the euro
area compared with other regions; in
particular, the production structure of the
EU/euro area appears to be more
homogenous than that of the United States,
an economic area of a similar size.

- As a general trend, the direction of sectoral
re-allocation has been towards business
sector services. Only in some EU countries
is an increasing specialisation in relatively
high-technology industries apparent.

- Synthetic measures of sectoral specialisation
do not show much variation over time.
However, there was a slight increase in
sectoral specialisation for some smaller euro
area countries as well as in Denmark and
Sweden towards the end of the 1990s. This
phenomenon is somewhat more evident
within business sector services. As
mentioned, it is too early to detect any
potential impact of EMU on the production
structures of euro area countries.

- The analysis of labour productivity
developments indicates that aggregate labour
productivity growth patterns have been
predominantly shaped by intra-sectoral
increases of labour productivity, rather than
sectoral re-allocations, particularly in
manufacturing. Sectoral re-allocations,
however, have contributed positively to
labour productivity developments in
business sector services. Sectoral re-
allocation accounts, on average, for as much
as 50% of the increase of labour productivity
growth in these activities in the euro area.

- While in the longer term the EU and the euro
area have not systematically under-
performed the United States in terms of
productivity growth, European productivity
slowed relative to that of the United States in
the mid-1990s. At the sectoral level, this

ECB

Occasional Paper No. 19
July 2004

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