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Playing with inflated numbers

May 12, 2010

Most people would agree that the European Union and the euro single currency are part of a grand political and economic vision. But at times they are also a bit of a numbers game.

As Greece has shown with its less-than-reliable economic statistics, numbers can be fiddled to get budget deficits and debts down and meet the criteria to join the euro.

But the European Commission, the EU’s executive, is not above a bit of numerical jiggery-pokery itself, even if no one is suggesting that the Commission has made any numbers up. Its figures just don’t make much economic sense. 

Take the case of Estonia and inflation.

The Commission announced on Wednedsay that Estonia would be allowed to adopt the euro next year.  One of the criteria the Commission said it had met was the EU treaty’s inflation target. The treaty says a euro candidate country’s average inflation over 12 months must be no higher than 1.5 percentage points above the average of the three “best performers” in the EU.

By “best performers” the treaty means those countries with the lowest inflation rates.

In this case that was Portugal, Estonia and Belgium, which had inflation in the 12 months to March of -0.8 percent, -0.7 percent and -0.5 percent respectively. With 1.5 percentage points added on, the inflation target became 1.0 percent.

(It should be noted that in order to arrive at that figure, the European Commission had to leave aside Ireland, whose inflation rate of -2.3 percent was far below everyone else’s and therefore would have skewed the numbers too much.)

With an inflation target of 1.0 percent, Estonia easily made the cut since its prices effectively fell 0.7 percent.

But since when was deflation good for an economy or euro zone economic stability?

What would the European Commission have done, say, if a euro-hopeful had met all other criteria for membership but had an inflation rate of 1.1 percent?

Lithuania was previously told it couldn’t adopt the euro because it had an inflation rate that was 0.1 percentage points about the reference value. But to all intents and purposes, its economy was otherwise in good shape.

In all normal circumstances, an inflation rate of 1.1 percent is totally acceptable (not to say healthy). And here’s the real irony about the numbers game – inflation of 1.1 percent is comfortably below the European Central Bank’s own inflation target of slightly less than 2.0 percent.

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