Market integration and price convergence in the European Union

The implementation of international treaties in the European Union was expected to promote integration of consumer markets. Using Economist Intelligence Unit Worldwide Cost of Living Survey data, I analyze the convergence of prices for a range of traded goods and find that large price differences remain across Europe. Using high income non-euro European countries as a control group, I test the effect of the euro and the Single European Act on the convergence of prices within the European Union. Using a difference-in-difference estimation strategy, I find that the Single European Act, rather than the euro, reduced price differences and promoted market integration. Distinguishing between the two stages of the euro implementation shows increasing price divergence as a result of the common currency.