Inflation down to 0.7%, unemployment up at 12.2%: Bad omens for Eurozone

Press conference by Olli Rehn, Member of the European Commission, on the spring economic forecasts for 2012-2013. The economic situation differs considerably across Member States, also in view of the ongoing adjustment to the large disparities in external positions and structural conditions that have come to the fore over the past years. (EC Audiovisual Services).

Eurostat, the EU statistical service, estimates that euro area inflation in October fell to 0.7% from 1.1% in September. It was 1.6% in July and then fell to 1.3% in August. This is an alarmingly fast deceleration of consumer price dynamism, threatening Eurozone with real disinflation, way below the 2% benchmark set by the European Central Bank. This development together with the expressed intention of ECB to further lower its basic interest rate now at 0.5% may produce a negative synergy, leading to long-term disinflation and GDP stagnation. This prospect becomes even more plausible given that mainstream economic policies in euro area are persistently restrictive and there is a progressive deleveraging in both the government and the private sector, not to say anything about banks.

On top of that, the fundamentals of the real economy are equally disappointing. Unemployment is stubbornly high at 12.2% in September as in August. Even Germany is now under pressure, with subdued inflation and unemployment stuck at 5.3% for more than a year now. However, it’s even more discouraging that in this country, despite the much-advertised robustness of the economy, the number of people threatened with poverty, increased to 17% in 2012 from 12% only some years ago. As for the Teutonic export super performance, it has started to annoy not only the country’s Eurozone partners, like France and Italy but also the US and its other western allies.

US slams Germany

It is very characteristic that the US Treasury’s semi-annual economic report, which was published yesterday, uses very strong language against Germany’s export-led growth. In this respect, the US has changed the target of its criticism from China to Germany, blaming now Berlin that with its export targeted economic policies, it undermines the growth prospects not only of the rest of Eurozone, but of the global economy too. This is not the usual economic criticism between allies, but rather a rejection on the political level of Germany’s fundamental policy choices.

Later on yesterday, the German government reacted equally strongly. An announcement issued by Berlin’s Federal Ministry of Economics said “The trade surpluses reflect the strong competitiveness of the German economy and the international demand for quality products from Germany.” This development comes on top of the latest confrontation between the two countries, which was aggravated by the Press reports about Chancellor Angela Merkel’s mobile telephone taping by the American National Security Agency.

Coming back to Eurozone’s economic juncture of fast falling inflation, stubbornly high unemployment and financial deleveraging all over the euro area, it constitutes a non-promising synergy. In such an environment, the exorbitant discrepancies between member states seem to increase further, supporting the weak growth of surplus countries like Germany, to the detriment of the worst hit ones. In this respect, unemployment is still rising to unseen before levels in Greece, Italy, Spain, Portugal, Ireland, France and elsewhere while some of those countries keep losing large chunks of their GDP.

No light in the tunnel

The problem is that the world economy is also in a weak growth period, with only China having resumed a path of very strong GDP development. Consequently, there is no light at the end of the tunnel for the deficit Eurozone countries, while prospects of the surplus member states point to stagnation rather than growth.

The European Sting has repeatedly noticed that Eurozone is heading fast to close to zero inflation. The Eurostat flash estimate for the October inflation at 0.7% confirms this danger. Within three months, from July till October, the rate of change of the consumer price index lost more than half of its dynamic, from 1.6% to 0.7%. During the same time the euro has gained a lot of grounds with the dollar from the region of 1.32 to 1.38. This is an additional impediment to Eurozone’s weak growth prospects making exports of goods and services more expensive. Unfortunately, the expensive euro threatens the weak economies of the south more than the surplus countries, because their exports are more price sensitive than the German machinery and cars.

All in all, the fast deceleration of inflation to levels far below the 2% benchmark set by the ECB, is not a good omen for Eurozone. Inflation below the unit betrays a sluggish economy with no internal dynamism.