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(2004/C 65 E/084)

WRITTEN QUESTION E-1351/03

by Christopher Huhne (ELDR) to the Commission

(10 April 2003)

Subject:   Price convergence

Does the Commission believe that the euro has so far encouraged price convergence within the euro-area, thereby aiding the single market and improving the efficiency with which economic resources are allocated? Will the Commission summarise the evidence available?

Answer given by Mr Solbes Mira on behalf of the Commission

(26 May 2003)

The euro should encourage price convergence through a number of channels. First, the euro eliminates exchange rate fluctuations and differences in monetary policy within the euro area and thus removes these sources of price dispersion. Second, the elimination of exchange rate fluctuations reduces the transaction costs and risks attached to cross-border trade and investment. This should stimulate cross-border trade (1) and investment, increase competitive pressures in the euro area and hence push prices to convergence downwards. Third, the introduction of euro notes and coins should increase price transparency between products in different participating countries which should increase competitive pressures and push prices to convergence downwards. In theory this increased price transparency effect could also enable firms to co-ordinate prices more easily and could lead to upward price convergence, but such behaviour is against Community and national competition policy rules.

The euro will not eliminate all price dispersion in the euro area. Price dispersion will remain due to factors, such as differing indirect tax rates and barriers to trade, which Community policies are addressing. Moreover, even with fully integrated euro area markets price dispersion would remain due to factors such as differences in taste and transport costs.

The main data the Commission uses to monitor economy-wide price level convergence are Eurostat's price level index data. These data show that price level convergence in the euro area has continued since the euro was introduced in 1999. In 1998 price level dispersion (2) in the euro area was 12,9 % but in 2001 (latest data) it was 12,3 %. In the Community as a whole price level dispersion rose slightly between 1998 and 2001 and was more variable. The difference in the evolution of euro area and Community price dispersion since 1998 may have been caused by the introduction of the euro although other factors affect price levels as well.

Table 1 — Price level dispersion among the EU and euro area countries (3)

The data on price level indices before 2000 are affected by the gradual introduction of the new system of National Accounts (ESA95) since 1995 (4). The 2001 data are provisional.

The second main feature of the price level dispersion data is that there has been a slowdown in the Community and euro area price convergence in recent years (5) despite the introduction of the euro. The slowdown in price convergence may reflect that the initial impact of the Internal Market on price dispersion has worked through. In addition, the introduction of the euro was preceded by several years of increasing exchange rate stability amongst many of the euro members which means some of the impact of stable exchange rates on price convergence had taken effect before the introduction of the euro. In this context it is worth noting that price dispersion between Belgium, Germany, France, Luxembourg, the Netherlands and Austria which have enjoyed a long period of exchange rate stability with each other was only 1,3 % in 2001. Moreover, it is too early to tell whether the introduction of euro notes and coins in January 2002 will give a new impetus to price convergence given that the latest data are currently for 2001.

The most recent evidence on price convergence for individual products is contained in the following Commission publications:

These publications present a picture of considerable price differentials for individual products but with some tendency to convergence. For example, the latest report on car prices (data for November 2002) shows that price differentials for new cars are still substantial, although some convergence is taking place, particularly within the euro area. The Cardiff Report showed that between 1992 and 2001 prices for different products followed a variety of trends although the most common trend was convergence towards lower prices. The Internal Market Scoreboards showed considerable price differences between Member States for grocery and household items, fresh food and consumer electronics (data collected in 1999-2000) although countries were not found to be consistently high or low price countries for all products. The Supplement A found that price dispersion in the Community for all product categories investigated was higher than in the United States (data for 1998).

To summarise there appears to have been continuing price convergence in the euro area since the introduction of the euro in 1999 even if it has been at a slower pace than in the 1990s. However, there have not been many studies on this specific issue to date because it takes time for data to become available and it will take several years for the full effects of the euro to work through. The Commission will continue to monitor closely the impact of the euro on price convergence in the future.

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(1)  Both Bun and Klaasen (2002) and Micco, Stein and Ordoñez (2002) found a positive effect of EMU on trade between euro participants since the beginning of 1999 based on empirical data.

(2)  Price level dispersion is measured here as the coefficient of variation of participating Member States' price levels.

(3)  Price level dispersion is measured here as the coefficient of variation of Member States' price levels.

(4)  More details are given in Eurostat's Statistics in Focus 32/2002, ‘Purchasing Power Parities and related economic indicators for EU, EFTA and Candidate Countries: Preliminary results for 2000’ published on 30 July 2002.

(5)  This finding is supported by J. H. Rogers (2002) using a different price level dataset.

(6)  COM(2002) 743 final.

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