Persistent price differences across euro area countries indicate that the economic integration of these European countries is not yet complete. The study compares price differences between 11 euro area countries and 20 US city regions over a 56-year period. The euro area countries examined are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain. Together, these 11 countries represent 97% of euro area GDP.
Declining price level dispersion between European countries
In the 1960s, price level differences in Europe were approximately three times as large compared to the present time. Three factors are crucial in explaining this trend: income dispersion between countries, trade, and exchange rate volatility. Based on these factors it is possible to show how European price level differences developed over a long-term period. Figure 1 shows that price level convergence is not a linear process. While price level differences dropped sharply during some periods, in other they increased (see Figure 1).