Uncompetitive Currencies in Continental Europe?

One of the funnier things "The Economist" does in the field of educational tools is the The Big Mac Index.

The Economist's Big Mac index seeks to make exchange-rate theory more digestible. It is arguably the world's most accurate financial indicator to be based on a fast-food item**.

The Big Mac Index was founded in 1988. It has been used sparsingly over the last 21 years, but recently the Economist's website has gone back to publish it more often, even 3 times already this year. Go, have a look!

Current Situation

On July 16th under the wonderful title Cheesed Off the Big Mac Index pointed to a massive circumstances based uncompetitiveness of European currencies. We're gonna tell you. But, please, please with double sugar: Take it with a grain of salt.

WHEN demand is scarce and jobs are being lost, no one relishes a strong currency. A country with an uncompetitive exchange rate will struggle to sell its wares abroad and will also cede its home market to foreign firms. A weak exchange rate, by contrast, encourages consumers to switch from pricey imports to cheaper home-produced goods and services. So which countries has the foreign-exchange market blessed with a cheap currency, and which has it burdened with a dear one? ..... Businesses based in continental Europe have most to be cheesed off about. The Swiss franc remains one of the world’s dearest currencies. The euro is almost 30% overvalued on the burger gauge. Denmark and Sweden look even less competitive.***

Based on the Big Mac Index, it would appear that Mid and South Eastern Asian currencies have much room to appreciate against the Dollar and even more against the relatively expensive Euro.

Inside Europe and for non Euro countries it looks as if the Scandinavians and the Swiss, the wealthiest consumers for quite some years now (with the notable exception of the citizens of TRBTAMLGDoL (the real banking, tax avoiding, money laundring Grand-Duché of Luxembourg) would get into some trouble with their "export of material products" based revenues and jobs****. The UK on the other hand, thanks to near total liberalization has practically no competitive big industry any more but compensates with large exports of fincancial and other services. Bad for the manually talented people over their but good for London and Edinbrough based cognitive elites. Norway's got oil and fish for more than thrice its population and is the odd man out her anyway. Stay tuned and come back on Sunday when you can read if all that be true.

Explanations and Small Print

¹ Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should really buy the same amount in all countries if free trade really ruled the world. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac Purchase Power Parity is the exchange rate that would mean hamburgers in sesame buns cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

There are grossly adversary opinions too

D. Mario Nuti thinks the Economist's Burgernomics is too silly for words: It is the reasoning behind the lightheartedness that is faulty: “Care is needed when drawing quick conclusions from fast-food prices. The cost of a burger depends heavily on local inputs, such as rent and wages, which are not easily arbitraged across borders and tend to be lower in poorer countries. So PPP gauges are better guides to misalignments between countries with similar incomes.” Why, are the prices of burgers and hair-cuts easily arbitraged across borders? Bankers, businessmen and students love simplistic, unqualified propositions about economics. But the Big Mac Index is dis-educative and misleading to the point of being dangerous.

Final Verdict

We think that to be a rather harsh judgement. It references to a different plane than the one on which it is used. There is no scientific claim here, rather the proposition of a light tool for debate. We really wished, more professional people were already on the level of Burgernomics so one could start serious alterations from there.