Tue, Jan 13, 2015 - Page 9 News List

Low prices could see eurozone slip into ‘lowflation’ quagmire

As consumer prices plummet, pressure is on the ECB to come up with effective stimulus measures

By David Jolly  /  NY Times News Service, PARIS

Illustration: Yusha

On Wednesday last week, an official report showed that consumer prices in the eurozone fell 0.2 percent last month from a year earlier, the first time they had dropped since the dark days of the global financial crisis in 2009.

It is an outcome that economists have been predicting for more than a year and a trend that has long been complicating Europe’s recovery.

Now, the latest data are adding concerns that Europe is headed for a new financial and economic crisis. Unemployment remains persistently high. The euro has been particularly weak, and the political upheaval in Greece is prompting talk about the stability of the 19-country eurozone.

With the outlook deteriorating, pressure is mounting for the European Central Bank (ECB) to take more aggressive action to avoid a downward price spiral that could undermine the economy for years to come, and officals have been signaling that they could announce a major bond-buying program later this month.

However, the question that many economists have raised is whether the bank has waited too long to act, and whether its arsenal is powerful enough to address the eurozone’s fundamental problem — a lack of demand from businesses and consumers for goods and services. European Central Bank President Mario Draghi has said that the central bank alone cannot shoulder the burden of restarting growth.

“The eurozone is suffering from a profound malaise,” Center for European Reform deputy director Simon Tilford said. “It’s already in a deflationary trap of the kind we saw in Japan in the 1990s, but it’s less well-equipped than the Japanese to deal with it.”

The situation in Europe does not appear to meet the classical definition of deflation — a widespread, protracted and self-sustaining decline in prices. The continued global collapse of crude oil prices also contributed significantly to the decline, blurring somewhat the implications of the inflation report for the eurozone.

However, the trend is dangerous. The low inflation environment was already a signal of a listless economy, with consumers spending little despite low prices and companies having scant incentive to invest in their businesses.

If prices actually fall for an extended period, consumers might delay purchases in the hopes of getting better deals later, and businesses would see little reason to make products that would be worth less with each passing month.

“We’re not yet in a self-sustaining spiral,” Bank of America chief European economist Gilles Moec said, “but we’re close.”

Analysts said on Wednesday last week that it was now a certainty that the European Central Bank would announce aggressive new measures when it meets in Frankfurt, Germany, on Thursday next week.

They expect the central bank to say it is ready to begin effectively printing money that it would use to buy eurozone government bonds, even if it does not put the measures into practice for several months.

In doing so, the bank would follow an unconventional policy similar to the quantitative easing used by the US Federal Reserve to stimulate the US economy.

However, quantitative easing is a divisive issue in Europe because of questions about how to allocate the bond buying among eurozone countries, and who would pay if a government defaulted on bonds held by the central bank. That uncertainty is a main reason Germany does not want to put its taxpayers at risk of having to bail out the bloc’s weaker neighbors.

This story has been viewed 2360 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top