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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

31 October 2005

Convergent prices

The Financial Times reports today: “The cost of buying a range of goods and services in big European cities has become more similar … Comparing the price of a basket of 250 mostly branded goods across seven European cities, it found that the gap between Paris, the most expensive eurozone city, and Madrid, the least expensive, was only 3.8 per cent” (1). Too bad that the average income for a Spaniard is $23,300 while for the French it is $28,700, a difference of more than 20%. My friends in Greece will surely agree that price convergence is probably the worst effect of joining the eurozone.

But this is unlikely to make big headlines in Brussels—any indicator that Europe is converging is a good thing; after all, price convergence is a predictable short-term outcome of a common monetary zone (the long term effect should show a convergence in tradable goods and a divergence in non-traded goods according to income and spending patterns; the evidence suggests that this may be happening already). In other words, this report underscores one of the problems in the thinking about Europe: moving together in one area is not all that helpful if we diverge elsewhere. Nowhere is this truer than a convergence in prices while incomes fail to converge too.

References:
(1) Chris Giles, “Growth in EU price convergence,” Financial Times, 31 Oct 05

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