This paper highlights the factors that limit or increase cyclical divergence in the euro area and reviews one
policy area that is important in fostering a speedy adjustment to shocks: the transmission of monetary
policy via the housing market. A high interest rate sensitivity of housing markets is beneficial as monetary
policy is more powerful in damping cyclical fluctuations overall in the euro area. However, housing and
mortgage markets still differ widely, leading to asymmetric behaviour of individual countries. Large
differences exist in home-ownership rates, financial markets, taxation and supply constraints. Moreover, it
is important to have a financial system that can withstand asset price bubbles. In this context, the procyclicality
of bank provisioning is of concern as it could lead to a credit crunch and reinforce a downturn.
Prudential supervision across the area has become better co-ordinated, but still remains fragmented.
