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.
Illustration: Yusha
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.
The central bank has an official goal of trying to keep inflation at just below 2 percent, which it considers an optimal level for a healthy economy. However, the bank has not met that target in two years.
Japan’s experience in the 1990s showed that traditional monetary policy instruments are largely ineffective with nominal interest rates at zero — as they essentially are now in the eurozone.
Another way to address the problem might be for eurozone countries to drop their insistence on balancing budgets and to instead use tax cuts and public spending to create demand.
So far, however, European officials appear to be holding their course.
“Yes, the eurozone is going through a period of low inflation,” Dutch Minister of Finance Jeroen Dijsselbloem said in a statement in response to a query from the New York Times. “But one of the most important reasons for the current low inflation rate is the falling oil price. Core inflation — excluding oil prices — has recently slightly increased.”
The core inflation rate, which excludes energy and food prices, ticked up to 0.8 percent last month from 0.7 percent October, according to Wednesday last week’s data.
There is no question, however, that the eurozone is ailing. The bloc’s economy expanded 0.6 percent in the third quarter of last year on an annualized basis. That is far short of the US economy’s 5 percent growth, and recent data suggests that the pace of eurozone growth has been slowing.
That stark difference is one reason the value of the euro has been plunging against the US dollar in recent weeks. It fell again on Wednesday last week after the inflation report, declining more than 0.5 percent to US$1.1816 — the euro’s lowest level against the US dollar in nine years. As was the case the last time the euro was this low, fund managers are moving investments to the US in expectations of a better return on their money.
Consumer prices in the eurozone had not contracted on an annual basis since October 2009, when the slack global economy caused the bottom to fall out of the market for oil and other commodities. Last month’s negative rate was down from the 0.3 percent increase in November.
Well before eurozone consumer inflation fell below zero, the region’s low inflation rate had been raising alarms. Economists with the IMF warned early last year that the difference between ultra-low inflation, known as lowflation, and outright deflation was mainly a matter of degrees, as the weak price pressures could “scupper the nascent recovery and pressure the most fragile countries.”
Draghi said last week in an interview with the German newspaper Handelsblatt that the risk of deflation “cannot be ruled out completely, but it is limited.”
“We are not there yet,” he said. “But we need to tackle this risk.”
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations