Politics

Inflation: 'the convergence of eastern and western prices will have to wait 20 years'

Article published on July 13, 2007
Article published on July 13, 2007
What do you Europeans really think of rising prices and inflation in the Eurozone?

On 16 July, ‘Eurostat’ (the European Union survey institute) will publish the monthly inflation figures in Europe for June 2007; this is an opportunity to check whether the prevailing sense of price-rises correponds to reality. Philippe Waechter, chief economist at Natexis Asset Management in Paris and regular consultant to the international financial press, gives us his analysis.

Why is controlling inflation important?

The mission of the European Central Bank (ECB) is centred around a systematic control of inflation, especially to avoid violent changes in the economic cycle. However, we can identify two levels of action taken by its president Jean-Claude Trichet: if the ECB’s communication is branded by an anti-inflationist discourse, it is in fact due to economic activity – rise in GDP, consumption, investments etc –, which remains the underlying worry. If the financial markets appear to be worried about inflation, the real concern will be economic dynamism. Moreover, if we observe the current tendencies of price evolution, there is nothing to be anxious about. The detailed analysis of the consumer price index shows that the rise of house prices and food is slowing. Furthermore, despite an improvement in the employment market, the unitary cost of working is contained. There are therefore no strong and durable acceleration trends.

Does a high level of inflation in the Eastern European countries suit the countries of Western Europe?

The countries of Eastern Europe are currently playing catch up and the dynamism there is therefore stronger than in Western Europe. Generally speaking, in transition countries this stage of development takes place during a period of unprecedented growth in economic activity and salaries. It is therefore natural to note a stronger inflation in these countries.

When do you think we will see the synchronisation of prices between Eastern and Western Europe?

This process will be very long. When we refer to the problem of harmonisation, we must take into account the time scale that differs according to the country. We must wait for at least 5 years for the countries where the conditions are favourable, and up to 15 or 20 years for the others. The convergence is a long process to put in place. If we take Spain as an example, we notice that between 1986 and 1996 harmonisation took place very slowly, and towards the end of the 1990s, there was a very distinct acceleration, which is still happening there today.

Euro: from heads to tail

Spend a Euro today and you might not get very much back. In humble Hungary it will let you get your hands on a pint of milk (the samle price as a beer or a pint of milk in Italy), whilst in Spain and France it provides us with three and two pints respectively. A simple travel ticket is what really differs in price across Europe though. The strangest thing however is that for the price of a condom in Germany or Italy, we can buy up until five for the same sum in France - all you need is love, evidently...

So, what purchasing power do you have with a Euro-coin in:

Hungary: a beer / a can of Coke / a pint of milk / an ice cream / a tube ticket / a bottle of showergel / a cheeseburger / ten eggs

Portugal: a newspaper / a café / a tube ticket / a second-hand book / four packs of tissues / 14 photocopies / 30 minutes surfing the net

Spain: a newspaper / a café / a tube ticket / 2 loaves of breads / 20 photocopies / 6 eggs / 3 pints of milk / 2 condoms / 30 minutes surfing the net / 1 litre of petrol

Germany: 1 kebab / 1 Italian icecream with two scoops / 1 litre of petrol / 1 chocolate bar / 3 buns / and not even one condom

France: 1 baguette / 1 croissant with cream type thing / 15 minutes surfing the internet / 5 photocopies / 5 condoms / 1 pack of chewing gun / 2 litres of milk / 6 eggs

Italy: 1 café / 1 newspaper / 1 pint of milk / 10 photocopies / 1 condom / 1 icecream

Holland: 2 Pinball matches / 4 bananas / 2 cafés from the university coffee machine / 5 photocopies

Fernando Navarro Sordo, Paris

(Inbox photo: Warein Holgado/ Flickr)