Question

Why can inflation rates differ across the EMU member countries? What are the consequences? (200 Words)

Answer 1

As we know that European union was founded on 1 November 1993 at Maastricht, Netherlands. The EU is headquarted at Brussels, Belgium. It has 27 members. Euro is the official currency of the union. It is the largest customes union in the world.

Inflation as we know is the contineous increase in the general price level in the economy. It simply means too much money chasing too few goods. The purchasing power of money is very low. The money can buy very little amounts of goods and services when country is facing inflation.

EMU is the European monetary union, to regulate the the monetary policies of EU. The Economic and Monetary Union (EMU) is an umbrella term for the group of policies aimed at converging the economies of member states of the European Union at three stages. In spite of being a common union, different countries have different rates of inflation. At the same time, inflation differentials in the euro area appear to be very persistent, in the sense that many countries have systematically maintained either a positive or a negative inflation gap against the euro area average since the introduction of the euro. This persistence of inflation differentials seems to be a feature specific to the euro area, where seven of the 12 economies have recorded annual inflation rates that have remained either consistently above or consistently below the euro area average since 1999.

The internal factors are the one reason why rate of inflation is different in EMU. In fact internal factors such as the unit labour costs, profit margins and net indirect taxes are the most important contributors to the inflation differentials in relation to the euro area average. As regards the internal sources of inflation differentials, the main contributions to the differentials came from unit labour costs and the gross operating surplus. In Germany, France and Finland, in particular, below-average dynamics in terms of both unit labour costs and the gross operating surplus contributed significantly to the negative inflation differentials of those countries in relation to the euro area average. The difference in inflation rates in EMU are due to structural differences, due to vonvergence process, external factors, internal factors and also due to policy differences.

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