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Introduction of the Euro boosts integration in the eurozone

31 August 2005

Introduction of the Euro has significantly aided economic integration in the European Union, the 2005 World Congress of the Econometrics Society, which is hosted by UCL (university College London), will hear on Saturday.

Dr Paul Kattuman and colleagues from the University of Cambridge looked at how the prices of a range of consumer products have changed since formation of the European Monetary Union in 1999 across 11 member states.

Previous studies have found that there has been little movement towards price convergence but using more extensive data the Cambridge researchers show that the monetary union has led to price convergence.

Relative to the UK , Denmark and Sweden , who are outside the euro zone, there has been a 10 per cent annual reduction in price dispersion in non-perishable goods and there was a five per cent annual convergence in the price of electrical appliances in the eurozone after 1999.

Little price change was observed in perishable goods, and alcohol and cigarettes but this is expected as their price is influenced by transportation costs, in the case of perishable foods, and by local taxes, in the case of alcohol and cigarettes.

“Once past the initial, transitional phase of the changeover, a common currency eliminates transaction costs and exchange rate risks. Through price transparency, trade and competition are increased and price convergence further strengthens trade and competition in a two-way reinforcing process,” says Dr Kattuman.

“In real terms this means we can expect to see prices to converge to the lowest in the zone. For example, cars are currently cheapest in Finland , as prices converge people in countries such as Germany , where they're more expensive, should see the cost of cars come down. Purely from a trade point of view, as this convergence gathers pace it will make sense for the UK to join the Euro.”

The paper used data from Eurostat, which contains comparative prices of how much people spend on 115 tradable categories of products in the 15 euro zone countries over the period 1995-2002. By employing a consistent series of price indices for a large number of products and by using country rather than city data they were able to build a more accurate picture of how prices changed.

“The Law of One Price states that prices of identical tradable goods priced in the same currency should, under competitive conditions, being equal across all locations, national and international. If prices differ, then it would be possible to profit from buying goods where they're comparatively cheaper and selling them where they're more expensive,” says Dr Kattuman.

“Previous studies have presented snapshot pictures of price convergence in different countries considering their macroeconomic and microeconomic impact. But differences in data did not allow them to build an evolving picture of price convergence.”

‘One market, one money, one price? Price dispersion in the European Union' will be presented on Saturday 20 August 205 between 14.15-16.15 BST.

A copy of the paper is available on request from the UCL press office.

For further information, please contact:

Dr Paul Kattuman
University of Cambridge
Mobile : +44 (0)7944092035
Email: pak13@hermes.cam.ac.uk

Judith H Moore
UCL Media Relations Manager
Tel: +44 (0)20 7679 7678
Mobile : +44 (0) 77 333 075 96
Email: Judith.moore@ucl.ac.uk

Notes to editors:

About the World Congress of the Econometric Society

The Econometric Society is the leading international learned society in the field of economics, and its quinquennial world congress is recognised as the most prestigious in economics. UCL is hosting the ninth Econometric Society World Congress from 18-24 August 2005, which is the first time the Congress has been held in London and has not been hosted by a UK institute for 35 years. A full copy of the programme can be accessed on the 2005 Econometric Society World Congress website: http://www.eswc2005.com/

About the UCL Department of Economics

The Chair of Political Economy at UCL was created in 1828 establishing the first Department of Economics in England . The modern department has an outstanding international reputation in key areas of current research including applied theory, microeconometrics, game theory, labour economics, development economics, macroeconomics, industrial economics and environmental economics. It is one of only four economics departments in the UK to achieve the 'double 5*' rating in the two most recent (2001) national Research Assessment Exercises (RAE).