Latest Data: 24 September 2018

How the Euro is Creating Potentially Permanent Unemployment in Greece, France and Italy; and the Negative Consequences of the Massive Turkish Devaluation

World Price Index data for September shows the continuing large under-valuation of the Euro in Germany relative to internal German prices and to the US Dollar, and the corresponding over-valuation of the Euro relative to internal price levels in Greece, France and Italy.

Given the Euro straitjacket, Greek, French and Italian exporters cannot escape direct competition with German producers by devaluing the external value of their internal prices, and are consequently suffering continuing substantial unemployment (see Chart 1).

The data also shows clearly the impact of the recent problems in Turkey (undervaluation relative to the Dollar of almost 60%), India (almost 40%), Argentina (35%) and Russia (30%) (see Table 1).

The halving in value of Sterling relative to the US Dollar since the early 1970's, the loss of a third of the UK Pound's value against the Euro since 2000, together with the experience of many other weak currencies, shows that currency devaluation is unlikely to contribute to export success. These large effective devaluations merely destabilise the home economies of the countries concerned.

Table 1 shows the variation in valuation of a range of currencies relative to the World Price Index.

The following table separates out the relative under/over valuation of the Euro in Germany, Italy, France and Greece, compared with Unemployment levels. It is clear that Unemployment is highest where currency non-alignment is greatest. Whilst this doesn't constitute proof of causality, the chart does suggest Greek, French and Italian unemployment may not improve rapidly while German exports are priced so much more competitively.

Chart 2 shows the widening gulf between Greek internal prices and the Euro / USD FX rate over the past three years.

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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