Latest Data: 26 February 2018

Deep Fissures Within the Eurozone Persist

  • German / French valuation spread eases at 26% in February
  • German / Greek valuation spread widens to 43%
  • Eurozone Consumer Price Inflation set to accelerate in Q1 and Q2

The internal stresses within the Eurozone continue to plague the economies of the less competitive countries. Greece and France in particular continue to suffer badly from the divergence in external and internal price relatives. The overvalued Greek Euro (in internal price terms) compared with the undervalued German Euro (see Chart opposite) are now some 43% divergent.

Franco German spread at 26%
In February 2018, one US dollar bought €0.81 in the foreign exchange market, but the WPI methodology allows a comparison of the PPP values of a Euro in different countries. This permits an estimation to be made of the internal stresses within the Eurozone. For example, the respective WPI rates for Germany, Spain, Italy, France and Greece, the four largest Eurozone economies, against one dollar €0.79, €0.91, €0.88, €1.00 and €1.14 respectively, arising from differences in competitiveness and differing price levels between the main countries. This means, that German exporters face the advantage of a competitive exchange rate that is undervalued by 2% against the US dollar, while those in France suffer from an overvaluation of 24%: a spread of 26%.

These differentials help to account for the massive trade imbalance between Germany and the world as well as with its European partners. The undervaluation of the Euro stems from the European Central Banks quantitative easing policies, which were aimed at avoiding deflation in the Eurozone by stimulating demand and raising inflation. From Mid 2017 the Euro has regained strength and a result, the average value of the Euro in February 2018 ranged from an overvaluation of 9% to 11% depending on whether country WPI rates are averaged equally or in relation to GDP.

Inflation returns
The ECB’s policies have had a continuing influence on the relative valuation of the Euro in PPP terms. The PPP value of the Euro against the dollar has moved from an undervaluation of 5% in February 2017 to its current level of 11% overvalued. PPP parity against the dollar was first reached around May/June last year and the currency has continued to remain overvalued since then, with only a sharper upward trend in Q1 2018 becoming evident. Unfortunately, as shown by the World Economics Sales Managers’ Indexes, this inflation is a result of rising prices and expanding growth in China and in the US.

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 chart below.


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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.

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