Diverging Inflation in Eurozone Countries. Current challenges and future prospects of the monetary union

Seminar paper from the year 2022 in the subject Economics - Other, grade: 1,00, Vienna University of Economics and Business , language: English, abstract: This paper aims at answering the question why inflationary dynamics vary so much within the same currency union. What challenges does this impose on the common monetary policy makers at the European Central Bank in Frankfurt, Germany? Rising price levels are back and are currently endangering the strong post-pandemic economic recovery. In the last months, inflation in eurozone countries has reached levels unprecedented for decades.

This raises new challenges for monetary policy makers, when it comes to carefully assessing monetary policies future path, facing a potential tradeoff between safeguarding the post pandemic economic recovery and ensuring that inflation does not surge further. When analyzing current inflation numbers in eurozone it is conspicuous to see, that two countries diverge significantly: France and Estonia.

Frances¿s inflation of May 2022 was at 5.8%, whereas Estoniäs price levels have risen 20.1% compared to the previous year, almost four times as much as Frances¿s price levels. But why is Inflation rising again? What are the fundamental reasons for such a significant divergence within Eurozone countries? Why does France seem to handle inflation so much better than Estonia?