WRITTEN QUESTION E-0509/00

by Christopher Huhne (ELDR) to the Commission

(28 February 2000)

Subject: Assessment of inflation differentials

In the answer to Written Question E-2228/99(1) given by Mr Solbes Mira on 20 December 1999, the Commission says that it will assess inflation differentials in view of the overall economic situation in order to avoid any harmful divergence in inflation. Given that it also states that it would be fraught with difficulty to provide a quantitative assessment of the scope for sustained inflation differentials across the euro area, how does it propose to assess such inflation differentials? Would the Commission's proposed assessment be more credible if it were based on a study of this issue ex ante rather than ex post? Will the Commission publish such a study albeit with any necessary emphasis on the uncertainties involved in the assumption?

(1) OJ C 219 E, 1.8.2000, p. 127.

Answer given by Mr Solbes Mira on behalf of the Commission

(27 March 2000)

The Commission and the Council constantly monitor economic developments in the euro area and in each of the Member States. This monitoring takes place inter alia in official documents, such as the annual review of the Community economy, and in surveillance discussions in the economic and financial committee, the economic policy committee, the Euro-11 group and the Ecofin Council. Monitoring of inflation differences and cyclical divergence across the euro area is a crucial aspect of economic surveillance.

The Commission recognises that sustained inflation differentials may occur in the Economic and monetary union (EMU). Recent empirical studies based on the Balassa-Samuelson framework are useful in stressing this fact and they form an important background element in the assessment of actual inflation developments. Nevertheless, a review of the assumptions underlying these numerical simulations suggests that it is fraught with difficulty to quantify ex ante the scope for sustained inflation differentials across the euro area. This cannot be done with any great confidence.

The Commission does not apply a static framework for assessing inflation differences across EMU and it will not do so in future. Rather, a variety of factors which may justify differences in economic performances have to be considered. The Commission currently assesses cyclical divergence and inflation differences on the basis of a wide range of indicators, including output gaps, economic growth, wages, unit labour costs, inflation, price movements for traded and on-traded goods, and movements in real exchange rates relative to long-run purchasing power parity (PPP)-levels.

In order to improve the understanding of inflation differentials in EMU, the Commission expects to launch an external study analysing the sources of sustained inflation differentials in a modified Balassa-Samuelson framework. The results of this study, which are expected at the end of 2000, will be made public. More important than providing a set of ex ante estimates of the scope for inflation differentials in EMU, the study is intended to help in improving and refining the framework used by the Commission to assess cyclical divergence and inflation differences across EMU.