WRITTEN QUESTION E-2228/99 by Christopher Huhne (ELDR) to the Commission. Sustainable inflation rates.
Date: 1999-12-01
Institutions: European Parliament, Provisional data
Subjects: Economic and Monetary Union, euro area, inflation, long-term forecast

1.8.2000

EN

Official Journal of the European Communities

C 219 E/127

(2000/C 219 E/158)

WRITTEN QUESTION E-2228/99

by Christopher Huhne (ELDR) to the Commission

(1 December 1999)

Subject: Sustainable inflation rates

Does the Commission agree with Balassa-Samuleson that the inflation rates in the European Union
eurozone members will tend to vary in the long run according to their differential productivity growth
rates (and the relative productivity growth rates of their tradeable and non-tradeable sectors); if so, would
the Commission provide an assessment of the sustainable inflation rates for each Member State in the
European Union(cid:146)s eurozone if the average inflation rate was to be (a) 1 per cent a year and (b) 2 per cent a
year. In addition, would the Commission please estimate the sustainable inflation rates, on the same
assumptions, if Greece, Denmark, Sweden and the United Kingdom were to join?

Answer given by Mr Solbes Mira on behalf of the Commission

(20 December 1999)

The experience from other monetary unions, e.g. the United States, suggests that inflation differentials
between regions in a monetary union may persist for extended periods of time, although they cannot be
permanent or large. Experience also indicates that current inflation differentials in the euro area are not
unusually high.

Across the euro area, there is scope for inflation to vary over a longer time period, especially as current
differences in price levels across Member States are expected to diminish. Price level convergence can be
expected to be driven by greater market integration, increased price transparency and a process of real
economic convergence, i.e. a convergence in living standards and productivity levels which may affect
relative price levels via channels such as the Balassa-Samuelson effect. Quite possibly, factors in addition to
the Balassa-Samuelson argument may play a role in promoting, or slowing down, price convergence.

It would be fraught with difficulty to provide a quantitative assessment of the scope for sustained inflation
differentials across the euro area. Some of the assumptions underlying the Balassa-Samuelson model
(e.g. long-run purchasing power parity for tradeables; wage equalisation across sectors within countries;
assumptions on production technologies) need not be fully satisfied in practice. The rate of productivity
differentials observed in the past need not be maintained in Economic and monetary union (EMU).
Structural changes such as liberalisation and deregulation may affect productivity growth, especially in the
non-tradeables sectors, and technological advances may be making more and more services tradeable,
i.e. shifting the boundaries between tradeables and non-tradeables, as may the single currency itself.

For these reasons, it is very difficult to predict the extent of sustainable inflation differentials in EMU. The
hypothetical question of how other potential entrants into EMU might fare is perhaps even more difficult
to answer.

Inflation differentials will be closely monitored within the framework of multilateral surveillance and
assessed in view of the overall economic situation in order to avoid any harmful divergence in inflation.