Wednesday, July 15, 2009

Most Euro Area Countries Fails Inflation Entry Criteria

Today Eurostat released detailed inflation statistics for the EU-and a few non-EU countries. The trends that I previously described, where the relative inflation/deflation rate of countries with bursted bubbles continues to decline, remains intact. Ireland for example now has the by far lowest inflation rate, at -2.2%. Estonia has now seen its rate fall below the average to -0.5%. And while Latvia at 3.1% is still above the -0.1% average, its relative inflation rate is falling faster than anywhere else, at more than a percentage point per month.

One new, interesting observation is that with regards to the formal inflation criteria for euro area entry, only 6 out of 15 existing euro area economies(data for the 16th member, France is not available), or less than half, would meet that criteria. The criterion is that inflation shouldn't be more than 1.5% above the average of the three EU countries with the lowest inflation rate. The 3 countries with the lowest inflation rate are: Ireland (-2.2%), Portugal (-1.6%) and Spain/Belgium/Luxembourg (all having -1.0%). The average of -2.2, -1.6 and -1.0 is of course -1.6, and so any country with an inflation rate above -0.1% would be ineligible.

Apart from the already mentioned countries, only Austria falls below -0.1%, meaning that 9 out of 15 would fail the test. To those convinced the criteria’s makes sense that would provide evidence against the idea of monetary unions. For those of us (yes, that includes me) who however do not think the criteria’s makes sense, it simply illustrates why they don't make sense.


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