The rising inflation rate is putting the brakes on the much desired goal of true convergence

Pronouncements on the country’s economic progress strongly emphasize Greece’s high growth rates (that is, the increase in GDP) in relation to those of the European Union as a whole, leading to the belief that these growth rates will speed up real convergence – in other words, that the GDP of this country as calculated in Purchasing Power Units (PPUs) will approach the EU average. A higher growth rate in Greece is, of course, the basic prerequisite for real convergence. But it is not the only one. Real convergence, which is ensured by these growth rates, is checked or accelerated if: a) inflation in this country, that is the increase in the harmonized consumer price index, is higher or lower than that of the EU as a whole, and b) the rate of population increase is higher than that of the EU as a whole. Eurostat The European Union’s statistical service, Eurostat, after long examination of the latest data available on all the above, along with other factors, reviewed per capita GDP in Purchasing Power Units (PPUs) in the EU member states for the period 1995-2000, gave definitive figures for the year 2001 and estimates for the year 2002. The statistics were published on December 18, 2003. Based on these figures and the data on GDP growth rates (last revised on December 4, 2003), this article will examine the effect of the rise in GDP in constant prices, and of inflation on per capita GDP in PPUs for the period 1995-2001. (Eurostat’s figures for 2002 are estimates only and will probably be revised.) Population data on which the review of December 18 was based were not made public. Thus we cannot examine the effect of population fluctuations. PPU changes Table 1 of the article gives the per capita GDP in PPUs of the 15 member states of the EU for 1995 (first column) and for 2001 (second column), with the EU average counted as 100. Increases or decreases between 2001 and 1995 in per capita GDP in PPUs is shown in percentage terms (third column). From this first table, it appears that per capita GDP as measured in PPUs rose in 10 countries. The most spectacular increase took place in Ireland, which from 12th place in 1995 rose to second place in 2001. Three other countries improved their position (Finland rose from 11th to 10th, the UK from 10th to ninth and the Netherlands from fifth to fourth). However, per capita GDP in PPUs dropped in five countries. The sharpest reductions took place in Germany (with the result that from sixth place in 1995 it sank to 11th in 2001) and in Italy (from ninth to 12th). Two other countries also sank to a lower position, Austria, from second to fifth, and Belgium, from fourth to sixth. Seven countries saw no change in position (including Luxembourg in first place and Greece in 15th, and last, place). As already mentioned, high growth rates, in relation to GDP growth rates in the EU as a whole, play a leading role in the real convergence of countries which, like Greece, Portugal and Spain both in 1995 and 2001, or like Ireland and Finland in 1995, have or have had per capita GDP in PPUs below the EU average. For countries with per capita GDP in PPUs above the EU average, a higher growth rate than average means a relative improvement in living standards, while a lower growth rate entails a relative lowering of standards of living. Table 2 gives the GDP growth rates in constant prices of the 15 EU member states for the years 1996-2001 (in the first six columns). Column seven gives the overall rise in GDP in constant prices in the period 1995-2001. The eighth column gives the overall rise in GDP of each country in relation to the EU as a whole. The order of countries in the table is listed in this eighth column, from highest to lowest growth rates (in relation to the EU as a whole). As shown by this last column, the first three countries and the last four countries are the same as those in the last column of Table 1. * The spectacular increase in per capita GDP in PPUs in Ireland is due to the fact that, during 1995-2001, the GDP rate of growth in constant prices was over four times that of the EU average. The same applies to Luxembourg’s huge growth rate, which was two-and-a-half times that of the EU as a whole. * The steep fall in the per capita GDP of Germany and Italy is due to the fact that, during 1995-2001, their growth rates were two-thirds or three-quarters of that in the EU as a whole. But on comparing the last columns in tables 1 and 2, it seems that the increase in overall GDP in one country in relation to that of the EU may be the basic factor in real convergence, but does not wholly explain it. For example, as shown in Table 2, the rate of growth in Greece and Portugal during 1995-2001 was 1.44 times higher than the EU average. Despite this, there was greater convergence in Portugal (7.6 percent) than in Greece (3.1 percent). As was noted at the beginning of this article, inflation rates in relation to those in the EU as a whole play a major role in slowing down or speeding up real convergence in countries with per capita GDP lower than the EU average. Increases in a country’s overall GDP take inflation into account, though not in relation to average inflation in the EU as a whole. To convert per capita GDP in national currencies or euros into PPUs, a conversion coefficient is used that is calculated on price levels of the basket of goods and services in a country in relation to the EU average. Calculations also include divergences from the EU average. For countries outside the eurozone (the UK, Sweden and Denmark), this relationship with the EU average also depends on their currency’s exchange rate with the euro. As is to be expected, the conversion coefficient tracks the harmonized consumer price index very closely. Another table (not shown) gives the conversion coefficients for 1995-2001 for all the 15 EU member states, as announced by Eurostat on December 18, from which it it appears that changes in the conversion coefficient from 1995 to 2001 were favorable in 10 countries (with France and Germany leading) and unfavorable for five (with Ireland and Greece topping the list). It is this that partly explains the differences in per capita GDP in PPUs between Greece and Portugal (the increase in the conversion coefficient of Greece was triple that of Portugal). Despite the fact that Ireland had a slightly greater rise in its conversion coefficient than Greece, its percentage increase in GDP in PPUs from 1995-2001 was 10 times that of this country, due to a GDP growth rate (as can be seen from Table 2) that was three times as high. From what this article has briefly covered, it seems that high inflation in relation to the EU average, in countries whose per capita GDP in PPUs is lower than the EU average, slows down real convergence; that is, it greatly reduces the favorable effect of high growth rates. A very high rate of growth, such as that in Ireland, accelerates real convergence despite high inflation. (1) Manolis G. Drettakis is former deputy speaker of Parliament, minister, and a professor at the Athens University of Economics and Business.

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