Inflation differentials within European Monetary Union (EMU) are increasingly seen
as exerting adverse effects on the price competitiveness of member countries’
firms and – given the common monetary policy within EMU – as being detrimental
to euro-area economies, in particular to those with relatively high inflation rates.
Using three simple measures of international price competitiveness for EMU countries,
the paper analyses whether these indicators have displayed distinctive trends since
the start of EMU and whether they converge with or diverge from their respective
fundamental value. It is found that all three indicators suggest a gain in competitiveness
for the German economy and a corresponding loss for Italy, Portugal and Spain. Two
of the indicators, however, suggest that these trends reduce former disparities and,
thus, contribute to a convergence of competitiveness within EMU while the third would
imply the opposite.