EMU Inflation Turns Lower

EMU inflation has begun to turn lower. Currently the EMU pace is at 2.6% and is above the ceiling the ECB has set for its inflation objective over longer periods of time (2%). As of January, only Ireland has a headline rate below the ECB ceiling. The table highlights the countries in EMU that have been running inflation rates higher than the EMU weighted average and lower than EMU average since the start of EMU. The third column in the table looks at the cumulative price increase by region since EMU was formed.

Germany, France, Finland and Austria have run inflation rates lower than EMU since its inception. The rest have run higher rates than EMU. Among those running the highest rates in the Zone are Greece, Spain, Luxembourg and Portugal. They have run the highest inflation since EMU has been formed.

A second to the last column of data compares the inflation rates by country to the lowest inflation performance, the accumulated price rise in Germany. Greece has seen its price level rise by 26% more than Germany since EMU was formed. For Spain and Luxembourg the difference is 19%.. Portugal has lost 15% to Germany, while Italy and Ireland have lost 11% . Belgium is just under a double digit loss in competitiveness at a 9.9% gap.

These gaps are indicators of how much competiveness has shifted since the Zone was formed and all nations were thought at the time to have been brought in at their proper parities…. Not surprisingly the countries that are in the most trouble for having debt problems stand at the top of the list for competitiveness losses. The one exception is Luxembourg which is a financial haven and is not a manufacturing center of any sort.

These figures cast light on the problems that will endure in the Euro-Area if the debt bomb can be diffused. There is nothing in the Greek bail out, for example, that do anything to boost Greek competitiveness. Traditionally these higher inflation countries have allowed currency depreciation to restore these periodic losses in competitiveness. But once in EMU the depreciation option is shut off. EMU has not monitored inflation differences or tried to eliminate them yet the consequences of these differences are not tearing the Zone apart and it still has no plan to address them.

The German solution is the Japanese lunch box approach where each country is put in its own box, has its own fiscal corset applied, and where balanced budgets would be mandated country by country. Even so it is not clear that with the ECB running one monetary policy for the whole Zone that there is enough competitiveness and enough integration for these regional price level and inflation discrepancies to be eliminated. While the debt crisis is the main event threatening EMU right now, the persisting inflation and accumulated price level differences are a similar problem perhaps more akin to termites in the woodwork. It may not seem as pressing but it is, in fact, just as serious in its own way and it represents a structural problem that is being ignored.

Inflation/Price Increases Since Formation of the EURO Diagnostic: Total HICP 1yr
Jan'12 Since
1999 Diff from
EMU Rate SAAR
Avg Rate Rank Diff w/
Germany Austria 2.9% 28.7% -1.8% 1.99% 10 5.3% Belgium 3.2% 33.3% 2.7% 2.26% 7 9.9% Finland 2.9% 28.4% -2.2% 1.97% 11 5.0% France 2.5% 27.1% -3.4% 1.89% 12 3.7% Germany 2.3% 23.4% -7.2% 1.65% 13 0.0% Greece 2.1% 50.1% 19.5% 3.22% 1 26.7% Ireland 1.3% 34.9% 4.4% 2.36% 5 11.5% Italy 3.5% 34.8% 4.2% 2.35% 6 11.4% Luxembourg 3.2% 42.4% 11.8% 2.79% 3 19.0% The Netherlands 2.9% 31.9% 1.3% 2.18% 8 8.5% Portugal 3.3% 38.7% 8.2% 2.58% 4 15.3% Spain 2.0% 42.7% 12.1% 2.81% 2 19.3% EMU Total 2.6% 30.6% 0.0% 2.10% 9 7.2% UK (EU) 3.5% 31.7% 1.1% 2.17% -- 8.3% US 2.9% 37.1% 6.6% 2.49% -- 13.7%