26 September 2017

Why 20% of Greeks Stay Unemployed

  • Greek and French economies continue to suffer from very large internal price over-valuation relative to Germany
  • Greek - German price valuation spread now 46%
  • France - German price valuation spread now 24.3%

The World Price Index (WPI) is a guide to whether currencies are under or overvalued relative to the US Dollar. The WPI is based on the theory that in the long run exchange rates should adjust towards the rate that would equalise the prices of an identical basket of goods or services in any two countries. So if the WPI basket (see methodology) costs $150 in America on any given date, but only $75 in India, the Indian currency is undervalued by 50%. We can measure internal prices in Eurozone countries, so we can see stress levels within the European single currency.

The most obvious strains evident in this month’s data are within the Eurozone, where internal country price differences cannot be reconciled by external currency movement, as the Euro is the currency for all countries. The October WPI shows that Greek price levels are 38% overvalued relative to the US Dollar. In stark contrast prices in Germany are undervalued by 8%, as the strength of the German currency is effectively pulled down via its association with the other weaker members of the Eurozone. Similarly, French prices are 16.3% overvalued relative to the US Dollar.

Adding the under-valuation of the German currency to the over-valuation of Greek and German price levels, we see the Greek prices are effectively no less than 46% overvalued relative to German prices and French prices are 24.3% overvalued relative to German prices. Given the huge disparities it isn’t difficult to imagine that the one in four unemployed Greeks and near 10% of unemployed French are quite likely to stay unemployed for some time to come. Whereas the already low German unemployment rate of 3.6% may well continue to fall.

Note: The WPI basket of goods and services consists of many different goods and services so theoretically replicates in simplified form the consumer price indexes found in most countries. However the WPI is produced very rapidly after the period covered, allowing significant inconsistencies to be revealed almost immediately after the date of the research.


 



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Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released during the 4th Working week of each month.
  • Latest month market exchange rates are calculated at the time of data collection.


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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