Cost of Living Not High Enough in EU

The EU may have many worries and woes that are slapping it around its face right now (and it could be said for a number of years), but there is one thing that is worrying economists more than the sovereign-debt crisis and that’s the fact that prices are not increasing enough. Economists at the European Central Bank have been demanding an increase in prices and for the ECB to react. If only they would ask the people what they actually thought, it would be certain that Europeans might well answer that the rise in prices is the last thing they need.

While Europeans have trouble finding enough money to pay the bills and eking out your salary is the order of the day for most people these days (and not just in Athens), it seems just a little far-fetched to ask for a rise in prices that is quicker today. As France gets a drop in the ratings by Standard and Poor’s and falls to AA (with a stable outlook).

The result for France was an increase in 10-year borrowing costs and bond yields that increased to 2.389% at the end of last week. Standard and Poor’s stated: “We believe the French government's reforms to taxation, as well as to product, services and labor markets, will not substantially raise France's medium-term growth prospects”. The statement went on to say: “ongoing high unemployment is weakening support for further significant fiscal and structural policy measures. Moreover, we see France's fiscal flexibility as constrained by successive governments' moves to increase already-high tax levels, and what we see as the government's inability to significantly reduce total government spending.”

EU Trouble with Deflation

EU Trouble with Deflation

Prices in France for example rose in September by just 0.9%. Admittedly, inflation is bad, but no inflation is just as bad. Why get your savings out of the bank when the prices will probably drop in the future anyhow? Borrowing money is hardly going to be on the agenda since in times of normal inflationary pressure, the repayments would decrease over time as a percentage of the income. In times of deflation the repayments remain considerably higher than they should be.

But, who in the EU believes that they have enough money to put up with another increase in prices? Perhaps if they hadn’t played about with the prices so much when they brought in the euro, they wouldn’t be in the mess they are in now. According to the ECB and Eurostat, while they admit that prices for everyday products rose considerably (without actually stating by how much), they have stated that prices rose on average only by 0.3% when the euro was introduced in 2002, which was added on to the inflation that year of 2%.

  • The annual average increase in prices was just 0.7% for the Eurozone according to economists by the end of October 2013.
  • Spain had an annual average increase in prices calculated at 0.5% in September and -1% in Greece.
  • Ireland was at 0%.

What is true is that countries with high levels of debt will have greater difficulty seeing that burden decrease over time if there is no inflation. Greece has a debt of 169.1% of GDP and Italy has a public debt of 133.3% of its GDP.

Feeling that prices increased in the EU?

Feeling that prices increased in the EU?

How many Europeans actually felt only an average price increase of ‘0.3% above normal’? Statistics can tell any old story we like really.

The Cost of Living

The Cost of Living Index for 2013, which is updated every year in Q1, uses New York City as the relative comparison and the base figure of 100%. All countries are shown as comparisons to that base figure.

  • The Groceries Index provides a comparison of grocery prices for daily products. The US as a whole has a weighting of 80.74%, which means that the cost of groceries over the entire country are nearly 20% cheaper than in NYC.
  • The UK has a weighting of 93.06%
  • France stands at 97.75%.
  • Germany comes in at 80.74%.
  • The most expensive country in the world for groceries is Switzerland, standing at 153.05%.

Local Purchasing Power

Local Purchasing Power in the Index of the Cost of Living shows the relative purchasing power and the ability to purchase goods or services with the average wage of that country.

  • Again NYC is the base rate of 100% with all other countries being compared to that.
  • The United States has an overall country-wide local purchasing power of 136.5% this year, meaning that the US as a whole can purchase on average wages of the country 36.5% more than New Yorkers can.
  • Everything is relative however, since the average wage can be largely bought into question.
  • Figures for the UK stand at 89.07%.
  • That means that the British can buy just under 11% less than New Yorkers.
  • France is at 98.11% and therefore stands on par with those in New York.
  • Germany stands at 117.58%, meaning that Germans make their euros go further than the dollar in New York, but way under what the average for the US is able to get for their money.

Average Wages in the World

The average monthly wage was published last year by the United Nations’ International Labour Organization and it averaged out to $1, 480 per month. It was the first time that such a figure had been published by the UN (2012 for 72 countries). Firstly, the figure is largely open to criticism because it is an average and secondly because it is for 72 countries in the world and therefore cannot be representative. Surely, at least the median wage would be a better starting point if we were going to compare anything. Averages are bad simply because they don’t take into account the excessively high or low income in some countries.

  • The average wage in the US is supposedly meant to be $3, 263.
  • In the UK (which is just one place behind the US in the listing, in 5th position) stands at an average wage of $3, 065 per month.
  • France has an average monthly salary of $2, 886.
  • Germany has an average monthly wage of $2, 720.

Maybe you can compare your own salaries to those averages and either see where you are or whether you believe it or not. We can do anything we like with statistics, it has to be admitted.

The ECB decided that their answer to deflation in the EU was to decrease interest rates to record lows.  ECB benchmark interest rates were decreased last week to 0.25%, from 0.5%. The euro fell against the dollar immediately by 1% and that may help the Eurozone become a better buy in the months to come.

In the meantime however, whatever good it may do to the Eurozone, the people there are hardly going to be happy that they have to have another increase in their prices yet again.

About The Author

tothetick

Professional team of writers/analysts analyzing the financial markets.

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2 Comments

  • tom kauser

    Reply Reply November 11, 2013

    Its the easing parade blowing up black and white examples for 2014? Everybody is blowing smoke bubbles except New York city that fine Burroughthat every other city compares itself too? Get a life

  • tom kauser

    Reply Reply November 11, 2013

    All academics aside eurozone will become battleground of differing opinies all leading to fractures and factions? The Central Banking system is going to also fracture under an overall lack of leadership due to Yellen's tehnocratic initial approach. Forward guidance will open Fed up to too much information and outside influence from former candidates and officials also. An initial fear could be the default of continuing to ease instead of acting and its weaknesses. One weakness is the eurozone members. Having reserves and spending reserves are differeñt side of same coin. At some time in process countries will be seperated by true cost of survival vice national prices? It is a certainty that at some point before a euro devalue that Swiss banks (the Austrians) will start the run on the euro or Apple comes for its wad!

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