REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the implementation of Regulation (EC) No 1445/2007 of the European Parliament and of the Council of 11 December 2007 establishing common rules for the provision of basic information on Purchasing Power Parities and for their calculation and dissemination
Date: 2013-06-17
Institutions: European Commission
Subjects: EU statistics, European accounting system, Eurostat, data transmission, dissemination of EU information, purchasing power parity, statistical method

EUROPEAN 
COMMISSION 

Brussels, 17.6.2013  
COM(2013) 420 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the implementation of Regulation (EC) No 1445/2007 of the European Parliament 
and of the Council of 11 December 2007 establishing common rules for the provision of 
basic information on Purchasing Power Parities and for their calculation and 
dissemination 

(Text with EEA relevance) 

EN 

   EN 

 
 
 
 
  
 
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the implementation of Regulation (EC) No 1445/2007 of the European Parliament 
and of the Council of 11 December 2007 establishing common rules for the provision of 
basic information on Purchasing Power Parities and for their calculation and 
dissemination 

(Text with EEA relevance) 

1. 

INTRODUCTION 

This report reviews the provisions of Regulation (EC) No 1445/2007 of the European 
Parliament and of the Council of 11 December 2007 establishing common rules for 
the  provision  of  basic  information  on  Purchasing  Power  Parities  and  for  their 
calculation and dissemination (hereinafter referred to as ‘the Regulation’) as required 
in its Article 14. 

The  report  summarises  the  state  of  implementation  of  the  Regulation  and  various 
developments since its adoption. It proposes a revision of the regulatory framework 
for  Purchasing  Power  Parities  to  reflect  those  developments,  as  well  as  to  align  it 
with the Lisbon treaty. 

2. 

BACKGROUND 

Purchasing  Power  Parities  (PPPs)  are  indicators  of  price  level  differences  across 
countries. They indicate how many currency units a particular quantity of goods and 
services costs in different countries. PPPs can be used as currency conversion rates to 
convert  expenditures  expressed  in  national  currencies  into  an  artificial  common 
currency (the Purchasing Power Standard, PPS), thus eliminating the effect of price 
level differences across countries. 

Their main uses are: 

• 

• 

to convert national accounts aggregates into comparable volume aggregates. In 
particular, PPPs can be used to compare the Gross Domestic Product (GDP) of 
different countries without the figures being affected by differing price levels 
in those countries. 

to analyse relative price levels across countries. For this purpose, the PPPs are 
divided  by  the  current  nominal  exchange  rate  to  obtain  a  price  level  index 
(PLI) that expresses the price level of a given country relative to others. 

PPPs also  have  important administrative purposes.  They play a role in defining the 
eligibility criteria of the Structural Funds and Cohesion Fund. The principal indicator 
determining  eligibility  for  the  Structural  Funds  is  PPP-deflated  regional  GDP  per 
capita,  whereas  for  the  Cohesion  Fund  it  is  PPP-deflated  Gross  National  Income 
(GNI). 

The  International  Monetary  Fund  (IMF)  uses  PPPs  when  deciding  the  quota 
subscriptions of its members. A country’s quota subscription determines the financial 

EN 

2 

   EN 

 
resources it is obliged to provide to the IMF, among other things. The weight of PPP-
deflated GDP in the quota formula is 20 per cent. 

Eurostat  produces  annual  PPPs  for  37  countries:  the  27  EU  Member  States,  three 
member  states  of  the  European  Free  Trade  Association  (EFTA),  one  acceding 
country,  four  candidate  countries,  and  two  potential  candidate  countries1.  The 
production  of  PPPs  is  a  multilateral  exercise  involving  the  National  Statistical 
Institutes of the participating countries, Eurostat and the Organisation for Economic 
Cooperation  and  Development  (OECD).  The  exercise  is  referred  to  as  the  ‘PPP 
programme’. 

Eurostat  has  been  producing  PPPs  since  the  1970s,  but  only  in  2007  was  the  PPP 
programme  put  on  a  firm  legal  basis  with  a  Regulation.  This  mainly  encoded 
practices at that time, ensuring sustained collection of the basic data and calculation, 
as well as dissemination of PPPs. Its main new feature was the set-up of a formalised 
system of quality control. 

Since 2007, the PPP programme has evolved. New methodology has been introduced 
or is imminent in a number of important areas such as education, health, energy and 
construction (see section 4.2).  

The PPP programme is closely related to Eurostat’s national accounts programme as 
it  is  based  on  the  European  System  of  Accounts  (ESA).  The  adoption  of  the  2010 
version of the ESA and its implementation in 2014 will also be reflected in the PPP 
programme. 

Article 14 of the Regulation requires its provisions to be reviewed five years after its 
entry  into  force.  The  Article  also  states:  ‘It  shall  be  revised,  if  appropriate,  on  the 
basis of a Commission report and proposal, submitted to the European Parliament 
and the Council’. This report proposes the Regulation be revised and offers a number 
of suggestions to this effect. 

3. 

IMPLEMENTATION OF THE REGULATION 

3.1. 

Transmission of basic data 

All  EU  Member  States  and  EFTA  countries  comply  fully  with  the  requirements 
regarding  data  transmission  stipulated  in  the  Regulation.  This  includes  their 
completeness, frequency, timeliness and adherence to the minimum quality standards 
defined in Annex I of the Regulation. 

All  acceding  and  candidate  countries  (except  Montenegro)  are  also  already  fully 
compliant.  Montenegro  and  the  two  Western  Balkan  countries  that  are  potential 
candidate countries are medium to highly compliant with the requirements. The main 
weaknesses  identified  for  these  countries  lie  in  the  provision  of  detailed  national 
accounts data. 

3.2. 

Calculation and dissemination of PPPs 

Eurostat  calculates  and  disseminates  PPPs  on  an  annual  basis,  going  beyond  the 
minimum  requirements  of  the  Regulation.  First  estimates  of  PPPs  for  year  t  are 
published  in  June  t+1,  with  subsequent  revisions  in  December  t+1,  December  t+2 

1 

The  Regulation of  course only  applies  to  the  Member  States  and  the  EFTA  countries.  The  remaining 
countries participate in the context of their accession or potential accession preparations. 

EN 

3 

   EN 

 
                                                 
and  December  t+3  (final  estimates).  No  further  revisions  are  made  to  these  final 
PPPs, in accordance with the Regulation. 

Eurostat publishes PPPs, price level indices, per capita volume indices and a number 
of other indicators for 60 categories. 

3.3.  Methodological manual 

The Regulation requires Eurostat to produce and maintain a methodological manual. 
The  first  version  of  the  ‘Eurostat-OECD  Methodological  Manual  on  Purchasing 
Power Parities’ was published at the end of 2006. In 2012, it was completely revised 
and fully updated to reflect the most recent methodology. It is available on Eurostat’s 
website2. 

3.4. 

Quality control 

The  Regulation  (Article  7)  introduced  a  formal  process  of  quality  control  into  the 
PPP  programme.  All  countries  provided  a  structured  set  of  documentation  on  their 
sources and methods for the collection and provision of basic data. The set consists 
of a survey report for each consumer goods price survey (cf. Section 5 of Annex I of 
the  Regulation),  as  well  as  an  ‘Inventory’  of  sources  and  methods,  giving  a  full 
description  of  the  manner  in  which  the  Regulation  has  been  implemented  (cf. 
paragraph  5.3.1  of  Annex  I  of  the  Regulation).  For  both  types  of  information,  the 
structure is laid down in Commission Regulation (EU) No 193/2011 of 28 February 
2011 implementing Regulation (EC) No 1445/2007 of the European Parliament and 
of  the  Council  as  regards  the  system  of  quality  control  used  for  Purchasing  Power 
Parities. This Commission Regulation was required by Article 7(4) of the Regulation. 

Eurostat  started  formal  assessments  of  Member  States’  practices  in  2011  (cf. 
paragraph  5.3.2  of  Annex  I  of  the  Regulation),  after  a  period  in  which  countries 
drafted  their  Inventories.  By  the  end  of  2012,  10  countries  had  been  visited  and 
assessed.  The  assessment  reports  are  available  on  Eurostat’s  website.  These 
assessments  include  an  in-depth  analysis  of  the  sources  and  methods  used  by  each 
country  and  a  verification  of  their  compliance  with  the  Regulation  and  the 
methodological manual. 

3.5. 

Financing 

PPPs  are  fundamentally  international  statistics  and  have  limited  national  purposes. 
That is why Article 13 of the Regulation stipulates that Member States shall receive a 
financial  contribution  from  the  Commission.  This  contribution  amounts  to  a 
maximum of 70 % of the costs eligible under the Commission’s grant rules.  

The Commission  proposes  to  maintain this financial support, which is necessary to 
ensure the sustainability of the PPP programme. 

4. 

DEVELOPMENTS SINCE THE ADOPTION OF THE REGULATION 

4.1. 

Rolling Review 

A Rolling Review on the PPP programme was carried out in 2010 in the context of 
Eurostat’s Quality Assurance Framework. The Rolling Review consisted of a survey 
among users, a survey among partners (mainly the National Statistical Institutes) and 

2 

See http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-RA-12-023/EN/KS-RA-12-023-EN.PDF. 

EN 

4 

   EN 

 
                                                 
a self-assessment by Eurostat. The executive summary of the final report is available 
on Eurostat’s website3. 

The Review concluded that users and partners rated the quality of the published PPP 
highly. It says: 

‘The production of European PPPs is based on the PPP Regulation and this ensures 
a high level of harmonisation of PPP data. In addition, the data collection is based 
on  a  strong  methodological  basis  and  has  adopted  well  established  European  and 
international  definitions  and  nomenclatures.  The  work  in  the  PPP  programme  is 
efficiently  organised,  coordinated  and  guided  by  Eurostat  and  the  OECD.  There  is 
very low response burden for individuals or business enterprises. The use of common 
software  tools  for  item  list  management,  data  entry  and  validation  and  of  data 
transmission standards greatly facilitates the work of Eurostat and its partners.’ 

The  Review  report  formulated  a  set  of  recommendations  that  Eurostat  is  following 
up.  

4.2. 

New methodology in special areas 

The methodology for comparing prices and volumes of different goods and services 
across countries is evolving continuously. 

• 

In the area of education, Eurostat  introduced  a  new  methodology  in 2008. This 
measures the volume of output directly, rather than basing the PPPs on prices of 
inputs  (such  as  teacher’s  salaries).  This  method  is  applied  for  the  PPPs  of 
reference years 2005 onwards.  

•  For  health,  a  new  methodology,  developed  in  conjunction  with  OECD,  is  to  be 
introduced  in  2013,  for  reference  years 2010  and  onwards.  This  new  method  is 
based on evaluating quasi-prices for a set of standard medical treatments. 

•  For  construction,  the  implementation  of  the  survey  was  changed  in  2010  by 
spreading  the  data  collection  over  a  period  of  two  years  and  simultaneously 
reducing the number of construction projects to be priced.  

•  Finally,  in  the  area  of  energy  (more  specifically,  the  consumption  of  gas  and 

electricity) Eurostat is exploiting synergies with Energy Price Statistics4. 

The improvement in methodology is on-going and will continue. However, whenever 
a  new  method  is  introduced,  there  is  a  break  in  the  time  series  of  PPPs,  as  data 
preceding the innovation are no longer strictly comparable to data compiled after it5. 
The  Regulation,  in  Article  9(4),  states  that  published  final  PPPs  are  generally  not 
revised. This article effectively prevents Eurostat from providing users with a better 
service, which would be possible if the new method were to be applied as far back in 
the  series  as  possible.  That  is  why  this  report  proposes  investigating  whether  the 
Regulation’s policy on revision could be relaxed.  

Adopting the new methodology in each of the areas requires adaptation of the basic 
heading classification in annex II of the Regulation. 

3 

4 
5 

See 
http://epp.eurostat.ec.europa.eu/portal/page/portal/quality/documents/PPP%20Final%20Report_Executi
ve%20Summary_0.pdf. 
The details of the new methodologies can be found in the revised PPP manual. 
For  this  reason,  a  ‘b’  flag  for  ‘break  in  series’  is  added  to  the  2005  data  in  Eurostat’s  dissemination 
database for all variables that are affected by the introduction of the new method for education. 

EN 

5 

   EN 

 
                                                 
4.3. 

Classification of Individual Consumption according to Purpose (COICOP) 

For  the purpose  of PPP calculations,  household consumption  expenditure is  broken 
down  into  categories  derived  from  the  Classification  of  Individual  Consumption 
according to Purpose (COICOP). 

The internationally-agreed version of COICOP stops at the four-digit or class level. 
This is not sufficiently detailed for some statistical applications, and as a result, there 
are different versions of COICOP at the five-digit or subclass level.  

Within  the  European  Union,  three  five-digit  versions  of  COICOP  were  developed: 
one  for  Household  Budget  Surveys  (HBS),  one  for  the  Harmonised  Index  of 
Consumer Prices (HICP) and one for PPPs. The three versions are not the same and 
this  compromises  comparability  across  the  three  statistical  domains.  Harmonising 
COICOP-PPP and COICOP-HICP has particular relevance for the PPP Programme: 
it will improve the quality of extrapolations of PPPs from survey years to non-survey 
years carried out with HICP indices. 

In 2010, Eurostat started the process of developing a 5-digit version of COICOP to 
be  used  by  all  Eurostat  statistics.  The  process  was  limited  to  the  five-digit  level. 
Changes at the four-digit level would have to be discussed in the context of a broader 
revision involving the United Nations Statistics Division, the guardian of COICOP. 
The objective at five-digit level is to draw up a master classification with subclasses 
defined  to  meet  the  needs  of  the  PPP  Programme,  the  HICP  Programme  and  the 
HBS. The process was concluded in 2012. The classification is to be introduced in 
HICP, PPP and HBS by 2014/2015. 

The  harmonisation  of  COICOP-PPP  and  COICOP-HICP  should  lead  to  greater 
alignment between basic heading PPPs and their HICP extrapolators. It should also 
result in greater coherence in the presentation of PPP and HICP results and, possibly, 
in  the  results  themselves.  Finally,  it  will  no  longer  be  necessary  to  collect  CPI 
information  in  the  COICOP-PPP  classification  separately,  as  is  currently  the  case, 
thus reducing the survey burden on countries. 

The introduction of the harmonised five-digit COICOP in the PPP exercise requires 
an adaptation of the basic heading classification in annex II of the Regulation. 

4.4. 

European System of Accounts 2010 

The  Regulation  ensures  in  Article  2(2)  that  the  definitions  used  in  the  PPP 
programme  are  fully  in  line  with  those  of  the  European  System  of  Accounts  1995 
(ESA 95)6. The ESA 95 is currently being updated and a new ESA Regulation (‘ESA 
2010’) will be applied by the Member States from September 2014. 

The ESA 2010 keeps the theoretical framework of the system it will replace. There 
are  no  radical  departures  from  its  predecessor.  Even  so,  changes  will  occur  under 
gross fixed capital formation as a result of changes that have been introduced in the 
classification of fixed assets. 

The most important changes in this respect are the reclassification of expenditures on 
research and development (R&D) and on military weapons systems as expenditures 
on fixed assets to be included under capital formation. Previously, these expenditures 
were treated as intermediate consumption. Extending the assets boundary to include 
expenditure on R&D will raise both the levels of gross fixed capital formation and 

6 

Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and regional 
accounts in the Community. 

EN 

6 

   EN 

 
                                                 
GDP.  The  inclusion  of  expenditure  on  military  weapons  systems  will  increase  the 
level of gross fixed capital formation and, to a lesser extent, the level of GDP, but it 
will also reduce the level of collective services as these are estimated as the sum of 
their costs of production, of which intermediate consumption is one. 

Including  R&D  and  military  weapons  systems  in  gross  fixed  capital  formation 
requires  an  adaptation  of  the  basic  heading  classification  in  annex  II  of  the 
Regulation. 

4.5. 

Classification of Products by Activity (CPA) 

CPA 2008 is the latest version of the Classification of Products by Activity. It is a 
revision of CPA 2002, which itself is a revision of CPA 96. CPA 96 is the version 
that was used in Annex II of the Regulation to define the expenditure classes under 
gross fixed capital formation. CPA 2008 was introduced in the national accounts of 
Member States in 2011. A revision of annex II of the Regulation is thus required to 
align the PPP classification with the new CPA 2008. 

4.6. 

Lisbon treaty 

The Regulation also needs to be adapted to take into account the entry into force of 
the Lisbon treaty in 2009. In particular, the ‘comitology’ articles (Articles 11 and 12) 
need to be reviewed to bring them into line with new procedures. 

5. 

CONCLUSION 

The PPP Regulation has ensured the reliability and quality of the PPPs as published 
by Eurostat. However, the above summary of developments since the adoption of the 
Regulation in 2007 shows the need for a general update to  reflect  current practices 
and legal requirements. 

In  2013,  the  Commission  therefore  plans  to  propose  a  revision  to  the  regulatory 
framework for PPPs, to bring it into line with the provisions of the Lisbon treaty and 
to  reflect  developments  over  the  last  five  years,  including  a  revision  of  the 
classification in Annex II. 

EN 

7 

   EN