Among the hoped-for effects of the Euro's physical arrival are an increased transparency of the differences in retail prices between different EMU countries, and a subsequent pressure to equalize these prices. The argument for the latter is simple: with national currencies eliminated and everything priced in Euros, how can similar cars or loaves of bread have different prices on either side of a border? Pressures will be formidable to buy where prices are low and sell, or at least not to buy, where prices are high.

That argument, however, is naive, for it does not take a genius to compare the price of a car in Germany with the price of the same car in France. Everybody makes such calculations when they decide where to take vacations abroad, so why believe that they do not do it for other goods and services? People are not as stupid or lazy as politicians and bureaucrats think. The interesting question is this: how much are price discrepancies due to sheer ignorance and inertia, and how much are they due to factors that are unlikely to change with the Euro's arrival?

Start with the evidence on retail prices. UBS, the Swiss banking group, prices a standard basket of 111 goods and services in various cities around the world. For European cities, the results are listed in the table below, which uses Germany as the benchmark. Obviously, huge price differences exist- if people in Finland were to do their shopping in Spain, they would increase their purchasing power by 50%! So, if price equalization were to happen, citizens in rich countries would feast and those in poorer countries would pay through the nose. But that won't happen; price level differences will not change much, the Euro notwithstanding.

The UBS survey shows that prices in Frankfurt are 8% higher than in Berlin. Prices in Houston, Texas (to use prices in a similar unitary monetary area, the US) are 26% less than in NY, and somewhat less than in Los Angeles. Both differences matter because they show that price equalization does not occur simply because a common currency exists.

What, then, is behind lasting differences in prices within and between countries? There are three important factors:

anti-competitive practices. Of course free trade exists in principle, but there are often important snags at borders and within countries. In America, for example, it is illegal to ship wine privately from California to Massachusetts because wine wholesalers in Massachusetts managed to have a Federal law established that protects their huge profit margins. What would be easy arbitrage using the Internet and delivery services gets stopped in its tracks by trade organizations and manufacturers who convince legislators and/or bureaucrats to protect their monopoly rents. In Europe, anti-competitive practices are rampant. If the EU is serious about creating one market, plenty of work remains to be done.

differences in competition and scale. The smaller the market, the fewer the number of distributors that can serve it profitably. But the fewer the number of distributors, the less competition there is. So margins become fatter and prices higher. Often competition is limited by regulations that fragment markets, but sometimes it is a matter of it being unprofitable to arbitrage to, say, bring in your croissants from Belgium each morning.

retail prices. The critical point here is that a retail price includes not only the price of the goods but also distribution costs - wages of shop personnel, rent, advertising, profit margins, etc. These differ vastly across countries, as the table suggests. There are no big productivity differences between Finland and Portugal when it comes to standing behind a counter selling stockings. Yet wages are vastly different and hence we expect lower retail prices in poorer cities and countries than in richer ones. New York versus Houston makes that point just as well as France versus Greece. What goes for wages also goes for other distribution costs. In principle, the entire Eurozone forms a single market, but that is not how things work out in practice. There is a famous saying in America that "all politics are local." The same is true of prices. A survey of the cost of grooming a poodle in the Greater Boston Area conducted by Harvard's Kennedy School of Government revealed price differences in excess of 100%. A surprise? Of course not, pet grooming is expensive in rich parts of Boston and cheap in poor parts, just as haircuts are.

What is the upshot here? Price divergences are here to stay. The Euro will do little to change that. Over time, there will be a tendency for these divergences to be compressed, but that won't be a result of the Euro. It will arise from Brussels, the spread of web-based buying habits, and the emergence of EU-wide retail distribution. When all is said and done, however, European prices will look as they do in the US, where large divergences exist a century after free trade and a common currency were established between the states.