Since the beginning of the 1990s drastic devaluations of several European currencies as well as the sustained weakness of the dollar have markedly impaired the price competitiveness of those countries whose currencies are linked to the German mark. For Austria's export and tourism sector, the weakness of the currencies of important trading partners, Italy in particular, constitutes a serious challenge. The revised WIFO exchange rate index, with 1992 as the base year, will improve the analysis of the macroeconomic effects of changes in the exchange rates. The index measures the relation between the schilling and a "basket of currencies" from 23 OECD countries. The weight of each currency is based on the importance of each country in Austria's foreign trade. As in the old index the international purchasing power of the schilling is mainly determined by the exchange rate of the schilling against the German mark. The weight of the German mark rose from 43.2 percent in 1979 to 47.5 percent in 1992, a rise of 4.3 percentage points. The share of the dollar sank by 2.2 percentage points to 8.4 percent; but the dollar still takes third place behind the Italian lira (10.6 percent). The weight of the Swiss franc dropped sharply to fifth place, from 6.6 percent to 4.7 percent; the French franc advanced to fourth place (5.7 percent). The British pound (4.4 percent) and the Dutch guilder (3.7 percent) remain among the more important currencies. With a weight of 3.1 percent (+0.6 percentage point), the Japanese yen is ranked as number eight. The currencies of the EU countries have a total weight of 81.5 percent, while the five overseas countries have a share of 12.5 percent. "Third market effects", which reflect the competition between Austrian firms and exporters from other countries in foreign markets, have gained in importance in the computation of index weights. The weight of third market effects in the index of manufacturing products rose from 13.4 percent in 1979 to 17.1 percent in 1992. This shift is due to the intensification of international trade: domestic production as a percentage of production in OECD countries fell from 74.1 percent to 62.8 percent. Third market effects are almost twice as high in tourism (30.7 percent) as in trade with manufactured goods. Since the establishment of the EMS in 1979, the value of the schilling rose against all currencies with the exception of the Swiss franc and the Japanese yen. Over the last fifteen years, the trade-weighted exchange rate of the schilling rose by 28 percent in nominal terms, by slightly less than 2 percent per year. The strongest contributions came from the small soft-currency countries and from Italy (8.7 percent). If the trade-weighted index is adjusted for inflation differentials, the appreciation in real terms is 9.2 percent. Nominal exchange rate gains of the schilling against soft currencies are largely offset by higher inflation rates in these countries. The largest contribution to the rise in the trade-weighted exchange rate of the schilling in real terms comes from the German mark: in the long run inflation rates were lower in Germany than in Austria. But Austria has lost ground in terms of price stability in comparison with other trading partners as well: while in the first half of the eighties the accumulated rate of inflation in the OECD countries was 10 percentage points higher than in Austria, this differential dropped to 4 percentage points during the period 1990 to 1994. This means that since the mid-1980s the appreciation in real terms has become more pronounced, reducing the price competitiveness in international trade. Since 1992 Austria has been less and less successful in compensating the rise in the nominal exchange rate by lower inflation rates.