Price differences in Europe: The flaw of one price

Date: 18/10/03

A single currency, but many prices

A BOTTLE of whisky costs almost 80% more in Amsterdam than in Rome. But Italians should pause before celebrating: a packet of Nurofen to soothe a hangover is 70% dearer than in Amsterdam. The creation of the euro in 1999 was supposed to encourage prices to converge, by making it easier to compare prices in different countries. As with the internet, another force for price equalisation, fact has not always met expectation. Although price gaps narrowed in the euro's first three years, an annual survey by Dresdner Kleinwort Wasserstein (DKW) finds no more convergence in the past two.

The survey, which covers the six biggest euro-area countries, uses branded goods where possible, to allow like-for-like comparisons. Madrid has the cheapest total shopping basket, 10% less than in Paris, the most expensive city. Individual prices differ by much more. Pampers nappies cost 56% more in Brussels than in Frankfurt. A cinema ticket costs 170% more in Brussels than in Madrid. But Brussels is the place for Levi jeans - 43 % cheaper than in Paris.

The biggest price differences tend to persist in non-tradable services. Electrical goods, such as irons and televisions, are easily shipped across borders, and thus have the smallest price ranges. The euro should spur price convergence not so much because consumers shop across borders, but because greater price transparency encourages wholesalers to take advantage of price discrepancies.

So why do prices still vary by so much? There are at least three reasons: different tax rates, especially on alcohol; national tastes (eg, bottled water is seen as a basic good in some countries, but a luxury in others); and differences in the market structure. One big barrier is that there are still no large pan-European wholesalers or retailers, such as America's Wal-Mart. Leo Doyle, an economist at DKW, estimates that price dispersion within the euro area is still roughly twice as large as in America. That suggests that there is still huge scope for the further convergence of goods prices - which in turn implies different inflation rates in different countries.

DKW also finds that, thanks to the rise in the euro, prices in London are no longer higher, on average, than in the euro area; in 2000 London was almost 20% more expensive than the euro-zone average. Britons pay well over the top for their booze and cigarettes, but their country is cheaper by far for books and deodorants. Perhaps that is why so many of them turn up their nose at the thought of joining the euro.

There is a single currency in the twelve eurozone countries but still widely differing prices.

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