Ifo Viewpoint No. 33: Is the Euro a Price Booster?

Hans-Werner Sinn
Munich 11 July 2002

Everyone is upset. Consumer Protection Minister Renate Künast has even convened a “euro price-booster summit". The Chancellor shares the worries of the consumers. It seems that the worst fears have come true, that the introduction of the euro currency has led to a sudden boost in consumer prices. Is the euro a price booster?

By no means. In May the German cost of living index was only 1.1% above the corresponding previous-year level, the lowest value since November 1999 (1.0%). The European inflation rate in the year upto May 2002 was 2.0%, the same rate as immediately before the introduction of euro cash. A price boosting effect has certainly not occurred.

To be sure, the introduction of the euro has caused price adjustments. Since many price lists had to be reprinted for the euro transformation at the beginning of the year, previously planned price changes were concentrated on this date. Many price changes were deferred until the currency introduction, others were carried out in advance. Not all the prices were adjusted upwards. When prices were recalculated, many overdue mark-downs were implemented, and mark-downs planned for the future were realised ahead of schedule. As a result, in total very little happened. With regard to inflation the introduction of the euro was a non-event.

With the prices that did increase, there was a somewhat more rapid rise in prices for local services. These prices normally increase faster than prices for industrial goods because the wage increases that spill over from the industry sector can not be offset by corresponding growth in productivity. When euro cash was introduced, there was a slight price increase for these services. In the case of food products, which were 6.7% more expensive in January than in the previous-year month, the severe winter weather in south European growing regions for fruits and vegetables played a major role. In the meantime, prices here too have normalised; in May vegetables were 8.4% cheaper than a year ago. The prices for many industrial products, in particular in the area of entertainment electronics, also fell. Computer prices in May 2002 were more than 17% below their May 2001 levels. The net effect of all these variables was insignificant, as the unbiased statistics show.

The small scale of measured inflation is all the more remarkable since some administrated prices increases took effect in Germany on 1 January 2002, including the fourth phase of the eco tax and the increases in tobacco and insurance taxes. The sum of these effects is an estimated 0.4%. Without the increase in administrated prices, inflation from May 2001 to May 2002 would have been only 0.7%.

The discussion of the euro as price booster is largely in the realm of fantasy and subjectivity. It is a mixture of election campaigning and the summer recess, nothing more.

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

German original published as "Der Seelen-Teuro" in Süddeutsche Zeitung (2. July 2002, p. 22).