NCPA - National Center for Policy Analysis

Europe Looks To Deregulation To Defeat Inflation

October 11, 1999

European economists have come to realize that deregulation is a powerful tool for fighting inflation. So given the high degree of business regulation among European countries, the opportunities for reining in inflation are huge.

Germany's highly regulated economy and recent moves to deregulate electricity and telecommunications provide striking illustrations of the dynamics of the process.

  • Since competitors sprung up four years ago to challenge the monopoly Deutsche Telekom AG, the price of a daytime, three-minute phone call from Hamburg to Munich has fallen from about $1.12 to 39 cents.
  • Overall, phone rates declined nearly 20 percent between the end of 1997 and mid-1999.
  • Following recent moves to open Germany's electricity markets to competition, the electricity bill for a typical family in Hanover has declined 14 percent in six months.
  • Experts estimate that a 20 percent drop in electricity prices would shave half a percentage point off Germany's overall inflation rate.

Economists at Morgan Guaranty Trust Company figure that energy deregulation would take between 0.2 and 0.3 percentage points off the euro zone's inflation rate. Already-accepted agricultural reforms could shave a further 0.2 points off the annual inflation rate in 2000 and 2001.

But big regulated companies and their unions that see deregulation as a threat are rallying workers to protest moves in those directions. Observers report that -- unlike Americans -- Europeans rarely think of their interests as consumers. So they are easy prey to arguments aimed at continued regulation and protection of the status quo.

Source: David Wessel, "The Outlook: Curbing EU Inflation with Deregulation," Wall Street Journal, October 11, 1999.


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