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28.12.

2000 EN Official Journal of the European Communities C 374 E/93

(2000/C 374 E/108) WRITTEN QUESTION E-0510/00
by Christopher Huhne (ELDR) to the Commission

(28 February 2000)

Subject: Studies of inflation differentials

In the light of the answer to Written Question E-2228/99 (1), is the Commission aware of the studies
undertaken by academics and market participants into the sustainable inflation differentials of each
Member State in the eurozone? Would the Commission please list for each Member State the inflation
differentials which different studies undertaken by academics and market participants have suggested
would be sustainable?

(1) OJ C 219 E, 1.8.2000, p. 127.

Answer given by Mr Solbes Mira on behalf of the Commission

(4 April 2000)

Academic studies trying to assess the scope for sustainable inflation differentials in Economic and
monetary union (EMU) include Alberola and Tyrväinen (1998), and Canzoneri et. al. (1998). These studies
rely on the so-called Balassa-Samuelson model or an amended version thereof. The International monetary
fund has also attempted a cross-country quantification of the Balassa-Samuelson effect in several recent
reports. Market participants tend either to refer to these studies or to refer to the historical experience of
some existing monetary unions, notably the United States or the United Kingdom. The European central
bank (ECB) analysed the issue of inflation differentials in a monetary union in its monthly bulletin
of October 1999.

The simulated sustainable inflation rates in the academic studies are given in a table sent direct to the
Honourable Member and to Parliament’s Secretariat. The simulations rely on three basic assumptions: (i)
long-run purchasing power parity (PPP) will hold for tradeables in the euro area; (ii) the productivity
growth differential between tradeables and non-tradeables will remain the same in EMU in each country as
in the historical period; and (iii) prices in each sector will evolve in line with unit labour costs. Alberola
and Tyrväinen allow for differences in sectoral wage trends in what they call an ‘extended Balassa-
Samuelson’ model.

These numerical exercises are valuable in showing that sustained inflation differentials in EMU may be
justified. This fact needs to be recognised in the multilateral surveillance process and in the economic
policies of euro area participants.

The simulations should not be viewed as accurate predictions of future long-term differences in inflation
across EMU. The role of traded goods productivity bias in explaining real exchange rates across
industrialised countries is still a matter of debate in the economic literature (cf. Rogoff (1996)). In the
experience of EMU countries, national price levels measured in common currency have diverged by
considerably less over long periods than the above simulations suggest. The assumptions underlying the
simulations de facto have not been fulfilled (and need not be so in future), for example long-run PPP for
traded goods has not been satisfied for all countries in the sample (cf. Canzoneri et.al. (1998)); the relative
price of non-tradeables has risen generally less fast than indicated by relative productivity trends (cf.
Canzoneri et.al. (1998)); productivity differentials between sectors may change over time (the remaining
scope for catching-up in e.g. Italy and Spain is smaller today than in the early 1970s).

Experience from other monetary unions may help to shed light on the issue of inflation differentials in
EMU. From 1950 to 1978 (when the Irish pound ceased to be linked to the British pound), the average
difference in annual consumer price index (CPI) inflation between Ireland and the United Kingdom
(countries with a considerable difference in the level of economic development at the time) was 0,4 %.
Between Luxembourg and Belgium, the average difference over the period 1950-1988 was about 0,3 % per
annum.
C 374 E/94 Official Journal of the European Communities EN 28.12.2000

The Commission views the above mechanical simulations as upper limits on the likely scope for sustained
inflation divergence in EMU. Nevertheless, in the economic management of the euro area it is very
important to recognise that persistent inflation differences may be warranted in view of longer-term
structural forces. The Commission welcomes the Parliament’s interest in this important topic and would be
glad to discuss further these issues with the Honourable Member.

(2000/C 374 E/109) WRITTEN QUESTION E-0511/00
by Christopher Huhne (ELDR) to the Commission
(28 February 2000)

Subject: Disrespect for EU law by Member States

In the light of the answer to Written Question E-2230/99 (1) (3 December 1999) and to the picture of
sustained and increasing disrespect for European Union law, particularly by France, how does the
Commission propose to improve matters? Does the Commission recognise that its existing efforts to curb
infringements are inadequate? Does it believe that the system of penalties should be reinforced against
persistent law-breakers, and will it bring forward proposals to that effect in the forthcoming Intergovern-
mental Conference?

(1) OJ C 203 E, 18.7.2000, p. 153.

Answer given by Mr Prodi on behalf of the Commission
(10 April 2000)

The Commission considers that the existing infringement procedure in Article 226 (ex Article 169) of the
EC Treaty has proved its efficiency for years. Therefore the Commission does not intend to propose a
reform of this procedure.

The largest proportion of infringement proceedings initiated by the Commission is solved before any
action is taken in the Court of justice, the Member State having brought the infringement to an end. As an
illustration of this efficiency, in 1999 only 16,5 % of infringement cases having been subject to a prior
letter of formal notice had to be submitted to the Court by the Commission.

The possibility of a second action in the Court of justice with financial penalties (Article 228 ex Article
171 EC Treaty) introduced by the Treaty on European Union has again reinforced the efficiency of this
procedure.

Moreover, in order to ensure a more and more systematic review of the implementation of Community
law by the Member States, the Commission constantly improves its operational procedures in that field.
The Honourable Member is invited to refer to the forthcoming 17th report for an outline of these new
operational measures. This will be made available to the Parliament in the coming weeks.

(2000/C 374 E/110) WRITTEN QUESTION E-0516/00
by Michael Gahler (PPE-DE) to the Commission
(28 February 2000)

Subject: Nationality in relation to double taxation

A German and an Austrian are employed at the Frankfurt branch of the Austrian Chamber of Commerce,
a public body. Whilst the Austrian, as an employee of a public body, is treated as having his permanent
residence in Austria, the German employee comes under the double taxation agreement between Austria
and Germany. Pursuant to that agreement, he has limited tax liability in Austria unless, in accordance with
the judgment of the European Court of Justice in the Schumacker case, he applies for unlimited tax
liability.