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The World Price Index

Released: February 14, 2017

Germany Benefits From ‘Undervalued’ Euro
at Expense of US and Eurozone Partners

  • Euro valuation: Germany: -15%, France: +6%, Greece: +11%
  • Sterling rises to undervaluation of 9% against US dollar
  • Turkish Lira falls to 47% undervaluation

The World Price Index (WPI) data for February emphasises the continuing stresses pulling at the fabric of the Eurozone. Relative German and French price differences, the two core countries in the currency union, show a spread of 21% in competitiveness against the dollar in purchasing power parity (PPP) terms in favour of Germany. Sterling, although 9% undervalued against the dollar, is still at a higher value than that faced by German exporters. The Mexican peso continues to be weak against the dollar on trade war fears with the US, but its weakness has abated since the start of the year. The Turkish lira remains the most undervalued currency in PPP terms out of all the currencies tracked by the WPI.


Eurozone stress continues
The WPI methodology allows a comparison of the PPP values of a Euro in different countries. The internal stress within the Eurozone can then be estimated. In February 2017, one US dollar bought €0.94 in the foreign exchange market, but the average WPI rate across the countries monitored was also one dollar to €0.89 implying the Euro was 5% undervalued in PPP terms.

The stress in the Eurozone arises from the existence of differences in competitiveness and differing price levels between the main countries. This works to the advantage of Germany’s exporters with the WPI data showing that the German Euro was undervalued by 15% in February with a WPI rate of one dollar to €0.79 while the rate for France and Greece implied overvaluations of 6% and 11% respectively. It also compares to a PPP undervaluation of 9% for sterling against the dollar as the House of Commons has voted in favour of withdrawing from the European Union. The greater undervaluation of Germany fits in with the recent comment by Peter Navarro, US President Donald Trump’s top trade adviser, that Berlin was using a ‘grossly undervalued’ euro to ‘exploit’ the US and its EU partners.

Whether it is a deliberate currency manipulation or a direct consequence of the European Central Banks policies to hold the euro together by a massive bond buying programme, the economic consequences of Germany’s trading success and current account surpluses is slow growth and unemployment in countries like France and Italy. But it is a disaster for countries such as Greece who have been disadvantaged by a too strong Euro for its anaemic economy. On February 9th Germany announced that it had earned the world’s largest current account surplus at close to US$300 billion while the IMF is worried that policy differences between Eurozone countries will prevent Greece from ever repaying its debts. By February 10th the spread between Greek 10 year bond yields and German Bund’s had risen to 7.48%.


Mexican Peso and Turkish Lira hit by politics
The Mexican Peso at 33% undervaluation strengthened slightly in February, but its weakness remains predicated on trade fears about its future relationship with the United States. Meanwhile, the Turkish lira at 47% undervaluation is the most undervalued currency in the world in PPP terms tracked by the WPI. Turkey has a large current account deficit and inflation, but the semi-independent central Bank faces political pressure to keep policy rates down.


About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.
 










 

Notes to Editors

  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates.


About The World Price Index

The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.


About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity.

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists.

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