Italy and Spain fail EMU inflation test

Four European member states, including Italy and Spain, would fail to qualify for economic and monetary union on the basis of their current inflation records, according to new figures released yesterday from Brussels.

The data casts fresh doubt on whether the Italian economy in particular will be in strong enough shape for the lira to take part in a single currency from 1999.

The critical question for Italy, Spain and Portugal will be whether they can get their inflation performance to converge towards their European partners during the next 12 months. EU leaders are expected to meet in April, 1998, to decide which nations will be in the first group to adopt the euro.

According to the Maastricht Treaty, member states joining EMU must have an average rate of inflation that does not exceed the inflation performance of the three best performing countries by more than 1.5 percentage points.

Eleven out the 15 member states currently meet this criterion, according to figures issued by the European Commission. However, Spain, Portugal and Greece fail the EMU inflation test, on the basis of new harmonised measures of inflation.

Italy meets the Maastricht criterion if only one month's figures are taken into account. But on the European Commission's preferred method of defining the Maastricht criterion to consider 12 months of data, then Italy still fails the inflation test, too.

The new EU inflation measure, the Harmonised Index of Consumer Prices, calculates inflation on a comparable basis, by measuring the price changes of the same goods in each country. At the moment national indices are based on very different baskets of goods, and on different statistical methods to calculate averages. The discrepancies between national measures and the new EU index are widest for Sweden and the UK. The HICP measures UK inflation at 2.1 per cent in January, whilst the most commonly used UK measure, RPI-X was 3.1 per cent.

The new HICP for Germany shows inflation at 1.7 per cent, compared to the German consumer price index which stands at 1.8 per cent. For France, the national and EU measures of inflation coincide at 1.8 per cent.

The three lowest inflation countries in January were Sweden, Finland and Luxemburg. An unweighted average of their inflation performance is 1.2 per cent, putting the Maastricht ceiling 1.5 percentage points higher at 2.7 per cent.

However, the Commission's preferred way to calculate the inflation criterion is to examine inflation performance over a 12- month period. The Commission released additional figures to show the average inflation performance of member states over the last year, on the harmonised index.

By this measure, the three best performing countries were Germany, Finland and Sweden, with an average inflation rate over the twelve month period of 1.1 per cent, producing a Maastricht ceiling of 2.6 per cent. Italian inflation averaged over the last 12 months is 3.7 per cent, well above the criterion if measured in this way.

A spokesman for economics and monetary affairs commissioner Yves-Thibault de Silguy said: "Using the harmonised index you get all the countries except Portugal, Italy, Spain and Greece qualifying."

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