The statistics corner - Eurostat's Economic and Monetary Convergence Directorate

Business Economics, July, 1998 by Alberto de Michelis

Eleven European countries moved into Phase III of Economic and Monetary Union on May 1. Alberto De Michelis, Director of Eurostat's Economic and Monetary Convergence Directorate, discussed the statistical information used to reach the decision on EMU membership at a seminar in New York in April. These data together with other harmonized indicators being developed by Eurostat will be used by the new European Central Bank to manage monetary policy. Below are excerpts from Mr. De Michelis' talk entitled "EMU and Statistics: Lies, Damned Lies or ... Good Statistics?" - Maurine Haver, Editor, Statistics Corner.(*)

Everyone knows that famous saying attributed to Disraeli, the nineteenth century British prime minister: "There are three types of lies: lies, damned lies and statistics." We might well ask ourselves, a little over a century later, whether this still holds true or whether the science of statistics has evolved to such an extent as now to reflect faithfully the state of the country. I would remind you that the term "statistics" (or Statistik) was first used in Germany in 1749 and meant "science dealing with the facts of a state." But let us return to statistics in the modern sense and to the subject that currently dominates the scene: the euro. I would like to approach this topic from three angles:

1. What is the link between statistics and the euro?

2. What is the role of the European Commission, and Eurostat in particular, in the context of this statistics-euro link?

3. Are the statistics concerned reliable?

THE EURO AND STATISTICS: THE TREATY OBLIGATIONS

On March 25, 1998, following Article 109j of the Treaty of Maastricht, the European Commission and the European Monetary Institute each reported, independently, to the Council(1) on the progress made by the Member States in the fulfillment of their obligations regarding the achievement of Economic and Monetary Union (EMU). On the basis of these reports, the fifteen Heads of State and Governments of the European Union will decide on May 3, 1998, which countries will join the Monetary Union. The reports of the Commission and of the European Monetary Institute (EMI) have been drafted on the basis of a "common agreed database," which has been finalized by Eurostat (the statistical office of the European Union located in Luxembourg). They have examined the state of convergence of the economies of the Member States with reference to four criteria: price stability, government budgetary position, durability of nominal convergence and stability in the exchange rates of the currencies.

PRICE STABILITY

The Treaty states that a Member State is convergent in terms of inflation if it "has a price performance that is sustainable and an average of inflation, observed over a period of one year...that does not exceed by more than 1.5 percentage points that of, at most, the three best performing Member States in terms of price stability. Inflation should be measured by means of the consumer price index on a comparable basis, taking account differences in national definitions."

GOVERNMENT BUDGET POSITION

The statistics involved refer to the following two criteria: "whether the ratio of the planned or actual government deficit to gross domestic product exceed a reference value (3 percent) and ... whether the ratio of government debt to gross domestic product exceed a reference value (60 percent) unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace."

NOMINAL CONVERGENCE AND EXCHANGE RATE STABILITY

The third criteria is the durability of nominal convergence and exchange rate stability in the Member States assessed by reference to long-term interest rates "measured on the basis of long-term government bonds or comparable securities, taking into account differences in national definitions."

The reports of the European Commission and the EMI have also taken into account: "... the development of the ECU, the results of the integration of markets, the situation and the development of the balances of payments on current account and an examination of the development of unit labor costs and other price indices." The recommendation made by the two Institutions in their reports of March 25 is that eleven countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Portugal, the Netherlands and Spain) fulfill the criteria and can adopt the euro on January 1, 1999, and two countries (Greece and Sweden) do not fulfill the criteria. Because they are exercising their opt-outs, two countries (Denmark and United Kingdom) will not be included in the first group of Member States participating in the single currency.

Once Stage Three has begun in January 1999, the procedure of examining the convergence and sustainability of the European economies will be repeated periodically for as long as any Member States have a derogation (Article 109k) or are not in the first wave. Moreover, according to Article 104c, the excessive deficit procedure will continue to be applied in Monetary Union, and the "Growth and Stability Pact," agreed on in Amsterdam in June 1997, implies further statistical indicators that will have to be monitored.