How far does our dollar go in Europe

Purchasingpower parity (PPP) exchange rates arethe rates of currency conversion that eliminate the differences in price levelsbetween countries.   In other words, the exchange rate that would convert thebuying power of NZ$100 in New Zealand to the same buying power in anothercountry.

Thecurrent NZ dollar exchange rate with the Euro is about 2.11 which, if this wasthe PPP exchange rate, would mean that €100 would give us the same spendingpower in Europe as NZ$211 does in New Zealand.

Theactual PPP exchange rate between the NZ dollar and the Euro depends on thecountry concerned as prices between Euro-using countries are not the same.   TheOECD regularly estimates PPP exchange rates.   The latest ones relate to 2007,but relative price levels between countries do not usually change very quickly.The attached table shows the PPP exchange rates and the current actual exchangerates for four countries that use the Euro as their currency, and threeScandinavian countries that do not use the Euro.   (All numbers are in terms ofthe number of NZ dollars required to purchase one unit of the foreigncurrency.)

 

PPP Exchange Rate

Actual Exchange Rate

Ratio

Netherlands

1.74

2.11 (euro)

1.21

Germany

1.74

2.11 (euro)

1.21

France

1.70

2.11 (euro)

1.24

Spain

 

2.07

2.11 (euro)

1.02

Sweden

0.17

0.22 (kroner)

1.31

Denmark

0.18

0.28 (kroner)

1.58

Iceland

0.014

0.017 (kroner)

1.17

Forexample, €100 in the Netherlands should buy about as much as $174 in New Zealand.   In fact we have to pay $211 for that €100; an extra 21%.   On this basis wewould feel poor when in most of these countries, especially in Denmark.   Only in Spain would we feel roughly equally well off.   Are the numbers true for aNew Zealander travelling in Europe and do the comparisons tell the whole story?

As arecent visitor to Europe I would have to say that the numbers look a littlehigh. That is, we are not quite as poor as the ratios suggest.   Accommodationin Europe tends to be more expensive.   Food is surprisingly not much different,whether in a supermarket or eating out.   Indeed, very good meals for reasonableprices are easy to find in countries such as Spain, France and Germany.   Denmark is more expensive in this regard.   Petrol is of course much dearer thanin New Zealand with prices in Europe being the equivalent ofNZ$2.80-$3.00/litre.   Public transport, however, is generally cheaper than in New Zealand.   Furthermore the frequency, speed and reliability of urban transport systemsin European cities (notably metro systems) means that the total "user-cost" inboth money and time is much more attractive than it is here.

Tofurther encourage the use of public transport over private transport, carsthemselves are much more expensive than in New Zealand.   Higher registration feesand insurance costs, and toll roads raise the cost of private motoring anotherfew notches.   But having then priced private transport very highly, one cannotcomplain about roading infrastructure.   The motorways in Europe are top class,especially in France where the speed limit on the main roads is 130 km/hr andthere are no rubbish coarse chip surfaces that we seem to be seeing more andmore of around Wellington.   The recently completed 2.5 km Millau viaduct(pictured) not only cuts travel time by over an hour, it’s an absolutelystunning piece of engineering and design.   The 7.8 km Oresund bridge linking Copenhagen (Denmark) to Malmo (Sweden) is equally impressive.

Whichis best – expensive private car costs with excellent roads (but massive traveltime savings) and cheap, efficient public transport; or relatively cheapprivate motoring with inferior roads and expensive public transport?   Evenallowing for Europe’s economies of scale, one wonders which is ultimatelybetter for economic efficiency and thus our standard living.

Overall,our NZ dollar seemed to go somewhat further than implied by the OECD’s figures.  One should note though that the PPP exchange rates relate to final consumption – essentially household spending.   As a visitor to Europe there are a number of goods that one simply does not usually buy, themain one of which is housing.   This is an extremely difficult area in which toundertake international comparisons.   A significant factor in the price ofhousing is the price of land, or the location.   Can one sensibly compare ahouse with view over Wellington harbour with an apartment with a view of NotreDam, or with a canal-side apartment in central Amsterdam?     From myobservations in Europe it seems to me that housing is the main factor thatdampens the purchasing power of the NZ dollar in Europe and Scandinavia.   Thatis, a dwelling of similar size and quality, and a similar distance from thecentral business district of a capital city, costs more in Europe that in New Zealand.

Forthe visitor then, one’s NZ dollar generally goes a reasonable distance in Europe.   Bread, wine and cheese are cheaper, coffee is more expensive, clothes and homefurnishings vary tremendously in price and one has to shop around, transport isa wholly different package, and accommodation can be expensive.   On a PPP basisit is hard to argue that the NZ dollar is overvalued, at least with respect to theEuro and the various Scandinavian kroner.  

Incontrast our persistent balance of payments deficit suggests that the NZ dollaris overvalued.   I will discuss this inconsistency in a future article.

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