WRITTEN QUESTION E-1550/00

by Paulo Casaca (PSE) to the Commission

(18 May 2000)

Subject: Purchasing power parity (PPP) and its current use

In its reply to written question E-2218/99(1) the Commission acknowledged that there is no legal basis in Community law for the use of PPPs, and in its reply to written question E-0273/00(2) it proved unable to quote a single reference from economic theory which supports the practice of using PPP in order to compare the GDP prices of countries which use the same currency.

Nevertheless, in its reply to written question E-0272/00(3) the Commission defended the use of PPPs on the grounds of their widespread use by international institutions, public administrations, universities, research bodies, public and private undertakings, banking institutions, the media and individuals themselves.

In my written question E-0276/00(4), I gave an example of the use of PPPs by a national administration, and I could have quoted countless others such as the Economist's Big Mac, the Executive Quality Living Reports produced by the Corporate Resources Group, the Bayerische Landesbank surveys and a number of other academic or commercial studies.

The problem is that all these institutions arrive at totally different results from those produced by the Commission, which in fact represents an additional and crucial reason for questioning the use of the PPPs published by Eurostat.

Does the Commission not believe that the complete absence of harmony among the results obtained by the various methods of calculating PPPs, together with the lack of legal basis and theoretical foundation, constitutes a basic argument for discontinuing the use which it has made of PPPs up to now?

(1) OJ C 219 E, 1.8.2000, p. 124.

(2) OJ C 330 E, 21.11.2000, p. 114.

(3) OJ C 330 E, 21.11.2000, p. 113.

(4) OJ C 303 E, 24.10.2000, p. 170.

Answer given by Mr Solbes Mira on behalf of the Commission

(13 July 2000)

The Honourable Member cites three arguments for discontinuing the use of purchasing power parities (PPPs) within the euro area: a lack of legal basis; an absence of harmony among the results of different price surveys; and the lack of theoretical foundation of using PPPs. The Commission does not support these arguments.

With regard to the first argument, the Commission's reply to the Honourable Member's Written Question E-0272/00(1) has indicated the regulations concerning structural policies which have been adopted by the Council on the Commission's proposal and with the assent of the Parliament. These regulations oblige the Commission to calculate and apply gross domestic product (GDP) per capita in purchasing power standards for all Member States and their regions. Furthermore, in the reply to the Honourable Member's Written Question E-2218/99(2) the Commission supported a specific legal act setting up a stable framework in which the current methodology and work underlying the PPPs would be collectively accepted. This is the reason why in the next months the Commission will take an initiative in order to reach this goal.

Regarding the second and third arguments, all price surveys although they may vary in methodology and details have the common result that prices of non-traded goods (in particular housing and services) are lower in countries with a lower GDP per capita and higher in countries with a higher GDP per capita. This correlation has been confirmed for the Member States in a study recently published by the Commission(3). The explanation for this phenomenon has been given by Balassa and Samuelson (in 1964) and is mainly due to the lower wages in low-income countries. The main idea of PPPs is to take account of this effect that the purchasing power is higher than suggested by exchange rates in countries with lower prices for non-traded goods (and vice versa).

(1) OJ C 330 E, 21.11.2000, p. 113.

(2) OJ C 219 E, 1.8.2000, p. 124.

(3) European Commission: Market integration and differences in price levels between EU Member States; in: The EU Economy 1999 Review (European Economy) Brussels/Luxembourg 1999.