Irish Economy

Competitiveness regained? How prices in Ireland compare to the rest of the eurozone

30 Jun 2010

"It does seem baffling that a country which prides itself on its homemade bread, meat, dairy products and alcohol should be so expensive in each."

On Monday, Eurostat published the latest in its series on relative price levels across Europe. The press release outlines the relative cost of food, drink and cigarettes. Unsurprisingly, the fact that Ireland came close to the top of the list has generated headlines across all major media, as well as on sites such as Irish Economy.

It does seem baffling that a country which prides itself on its homemade bread, meat, dairy products and alcohol should be so expensive in each. One explanation is precisely because of our nationalism – we refuse to buy more efficient/cheaper imports, instead paying top dollar for something with an Irish flag on it. Or perhaps it’s because of transport costs – no part of continental Europe faces quite the same dependence on expensive freight options. Or perhaps it’s because of expensive costs, such as labour, rents and insurance. Tucked away in that last sentence is a more controversial suggestion – that it’s because the Irish pay themselves too much.

As you can see, this story can be spun any which way you want. A full explanation is well beyond the scope of a blog post – indeed it is more appropriate for a full scale Competition Authority report. What I thought would be useful to do here is give a quick recap on the facts of prices here and in particular how they compare with the rest of the eurozone.

To do this, it’s necessary to use some reference point, when we have relative price levels across the eurozone. Eurostat does this at annual intervals, but a lot of the time they back it out from other figures. 2005 was the last time they did the exercise from scratch, so let’s use the 2005 relative price levels. For changes from month to month, we can use the Eurostat HICP, which is a price index that is comparable across Europe. To do this, Eurostat have to leave out things like mortgage interest rates, as each country handles mortgages in a different way, but that is on balance a good thing for comparisons as it focuses on things where someone actually sets the price. The HICP numbers go from 2000, just before the Euro was introduced (but when exchange rates were already fixed) right through to May 2010.

Using these, it is possible to construct a relative price level across the eurozone from 2001 to 2010 (so far). The graph below shows relative prices in eurozone countries, compared to the eurozone average. So Austria, a red line very close to zero that becomes almost impossible to see, has prices that are pretty much equal to the eurozone average. A positive percentage means a country is expensive relative to the rest of the eurozone, while a negative percentage means relatively cheap.

Average price levels in eurozone countries, relative to average, 2001-2010

Average price levels in eurozone countries, relative to average, 2001-2010

There are some very interesting trends that emerge:

  • Two large eurozone members have slid slowly into more competitive territory – France and Germany were ranked 3rd and 6th most expensive in 2000 but are now 5th and 9th.
  • In sovereign debt markets, “PIGS” may have two Is, but in price level terms, they have none. Ireland and Italy are a world away from Greece, Spain and in particular Portugal, the cheapest country in the eurozone. Spain and Greece, though, have over the course of the last decade approximately halved the price gap with the eurozone average. Furthermore, 2010 data show no signs of prices slowing down in Greece.
  • Finland was easily the most expensive eurozone country back in 2000 and over the next six years gradually reduced its competitive disadvantage by about seven percentage points. That has gone into reverse since 2007, though, and prices have crept back up relative to the eurozone by almost three percentage points.

In relation to Ireland, its huge loss in price competitiveness did not occur, as popular belief might dictate, during the last days of the boom. The damage was done between 2000 and 2003, when prices went from 14% above the eurozone average to 21% above. They more or less stayed at the level until 2008, when they were 22% above. Since then, there has been a spectacular reduction in the price gap. While most other eurozone countries have treaded water, with prices typically rising a fraction of a percentage relative to the average, Ireland’s price gap has fallen by almost six percentage points in less than two years.

Given the large gap that existed as of 2008 between Finland/Ireland and the rest of the eurozone, a gap of 15 percentage points if one excludes Luxembourg, one should not expect Ireland to be anything lower than third place in the eurozone price league any time soon. However, to think purely in terms of the rank is to ignore the huge adjustment the Irish economy has made through prices over the last 24 months.

PS. Economics is complex and, as mentioned above, stories can be spun any way editors or journalists want. A classic example occurred just yesterday with apparently two entirely different Irelands getting profiled by the New York Times and the Wall Street Journal. First, the New York Times’ In Ireland, a Picture of the High Cost of Austerity:

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

And now the Wall Street Journal’s Weaker Euro Set to Spur Irish Turnaround:

Economists, however, are starting to feel less dismal about Ireland’s prospects because of the unique nature of its export economy… Ireland’s experience seems to suggest economies can recover even while slashing spending.

Confused?

PPS. If all this is a bit economicsy, why not take a look at Ireland’s top baby names during 2009, published yesterday? Look out for the remarkable set of Ava, Eva, Aoife, Aoibhe, Aoibheann, Aoibhinn, Eve and even Eabha in the girls’ top 100!

Tags: , , ,

One Comment

  1. John mcDermott said on July 12, 2010 | Permalink

    Big multinationals like LIDL and ALDI are worthy of extensive study.
    The prices in their mainland Europe stores are consistent-and low.
    While paying huge transport costs to our isolated island nation they still deliver- at lower prices than their Irish counterparts.
    I believe the clever nature of their operation is responsible for this.
    They are 75% a food store and 25% a clothing/ hardware store. (much higher profit margins here?)
    Their main wine supplier has an incredible state of the art production/bottling plant in Germany. this company imports wine in tankers from vineyards throughout the world. They have an ownership shareholding in many of these vineyards.See:
    http://www.vineris.com

One Trackback

  1. [...] were struggling to make ends meet (Ireland is one of the most expensive countries in the EU [ 1 | 2 ] ) and pay for your upcoming college year I can assure you it’s not the best situation to be [...]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

Categories

Tags

Subscribe

Ronan Lyons Posts RSS feed

Receive RSS updates of Posts and Comments.

Subscribe to Email Updates

Subscribe to Email updates.