Eurostat confirms a dangerously fast falling inflation in Eurozone

Jack Lew, US Secretary of the Treasury (on the left), and Michel Barnier, Member of the EC in charge of Internal Market and Services. (EC Audiovisual Services).

Jack Lew, US Secretary of the Treasury (on the left), and Michel Barnier, Member of the EC in charge of Internal Market and Services. (EC Audiovisual Services).

Yesterday Eurostat confirmed that the euro area inflation rate for December was down to 0.8% from 0.9% in November, dangerously approaching  the negative part of the graph. The announcement coincided with IMF Managing Director Christine Lagarde’s warning that weak growth in Eurozone is now also threatened by deflation (continuously falling prices leading to real economy crisis). On Wednesday Lagarde spoke at the National Press Club in the U.S. capital. Her statement is an indirect but quite clearly targeted criticism against Germany, the lead euro area country. Berlin has imposed an austere fiscal policy on the entire single money zone, thus creating a major impediment to growth and continuously pushing down consumer prices.

A major side effect of this restrictive macroeconomic policy is that the falling rate of inflation (disinflation) threatens to turn into deflation (negative inflation) and thus freeze Eurozone’s growth prospects for years, if not triggering a real economy devaluation crisis. In this way, Germany, and consequently Eurozone, negatively contribute to the world’s growth prospects, by absorbing through a largely positive external trade balance the development dynamic of other regions of the world, like North America.

Transatlantic confrontation

During the past few months the US government has raised the tone of criticism against this austere economic policy followed by Germany and imposed on the entire Eurozone. The Americans say that the Eurozone, under Germany’s guidance, has based its weak growth on exports and a grossly positive trade and services balance, depriving in this its trading partners from their own development dynamic. At the same time, this austere economic policy has suppressed inflation way below the target set by the European Central Bank at below but close to 2%.

On 8 January the United States Treasury Secretary Jack Lew, was in Berlin and met with the German Finance Minister Wolfgang Schäuble. To the extent permitted by the fact that Lew was on official visit in Berlin, he criticised with the strongest possible language the austere German economic policies. Schäuble pretended that this was a usual American grouchiness, resulting from the growing negative US balance of trade with Germany. He didn’t accept Lew’s proposal that by an increase of the internal demand in Germany, Eurozone will quickly reach a sustainable growth path and the world will find another support point for growth. Not a word about more investments and consumption in Berlin, where austerity shadows everything.

Yesterday, it was the turn of the IMF to point a finger to the Germans for doing nothing to help the Eurozone and the world economy grow at a quicker pace. This time Lagarde had another quite convincing argument to support her ‘advice’ to Berlin to change policy line; the threat of deflation. IMF’s boss probably knew that Eurostat was expected to confirm on Thursday that inflation in Eurozone fell to 0.8%, much lower than ECB’s target around 2%. She had a lot to say on that. For a start she playfully noted that, “If inflation is the genie, then deflation is the ogre that must be fought decisively”. Then Lagarde choose to touch Germany’s pain point; the lack of cooperative spirit.

Think of WWII

She pointed out that in order “to move forward, the world needs the same spirit of cooperation and global solidarity today, as the multilateral impetus behind the founding of the IMF”. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. The aim was to help the world recover from the unbelievable destruction caused by the largest armed confrontation in the human history. In short what Lagarde, a French woman, wanted to remind to the Germans, is that this is not the first time they don’t show cooperative spirit with the rest of the world.

In any case Germany’s inspired austere economic policies in Eurozone have now led to a point that may trigger the destructive forces of deflation. Following the course of core inflation in the last months the deflation prospect doesn’t seem as distant as the Germans believe. It’s very informative to follow the evolution of the rate of change of the inflation index excluding energy, food, alcohol & tobacco. This core inflation rate was 1.5% in December 2012, 1% in September 2013, 0.8% in October, 0.9% in November and 0.7% in December. The exclusion of energy, food, alcohol & tobacco from core inflation is justified on the grounds that those items do not represent the core productive structures of Eurozone’s economy.

In any case, if deflation reaches the core productive sectors of an economy, then there might not be an easy way out and the cost of it will be much larger than a timely change of course earlier on. This is exactly what everybody with one voice is pointing out to Berlin, from Washington and Paris to Athens and from Nicosia and Rome to London.

 

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Action needed to tackle stalled social mobility

Thinking throughout HIV: changing a perspective

Drinking water: new plans to improve tap water quality and cut plastic litter

What just happened? 5 themes from the COP24 climate talks in Poland

A junk food diet can impair your brain, study finds

What did we learn from COP25?

Neelie Kroes at the European Young Innovators Forum: Unconvention 2014

Lagarde discusses the European Central Bank’s policy revamp with MEPs

Sweden must urgently implement reforms to boost fight against foreign bribery

Lack of basic water facilities risks millions of lives globally: UN health agency

‘Global care crisis’ set to affect 2.3 billion people warns UN labour agency

‘Protracted crisis’ in Venezuela leads to ‘alarming escalation of tensions’: UN political chief

What next after more sanctions against Russia, will the Ukrainian civil war end?

European Commission presents comprehensive approach for the modernisation of the World Trade Organisation

3 trends that will transform the energy industry

The status of the Code of Medical Ethics: loading

Lagarde’s metamorphoses, not a laughing matter

Ireland’s planning to make its Emerald Isle even greener

What talent means in the post-COVID-19 workplace

‘Much more’ can be done to raise awareness about the plight of persons with albinism: UN chief

When nations work together, hope prevails and collective solutions can be found – UN chief tells Peace Forum, marking World War centenary in Paris

The US may be “open” to reviving TTIP, while the EU designs the future of trade with China

Climate change will shrink these economies fastest

Independent UN rights expert calls for compassion, not sanctions on Venezuela

Social enterprises can change entire industries. This is how

The countries with the most satellites in space

This is where people work the longest – and shortest – hours

GSMA Reveals Shortlist For 2019 Asia Mobile Awards

4 key ways countries can finance their SDG ambitions

Thursday’s Daily Brief: Climate emergency, call to support breastfeeding, rising political heat and new investigation board for Syria

3 reasons why responsibly-deployed technology is key to the COVID recovery

Urgent action needed to address growing opioid crisis

Misinformation and growing distrust on vaccines, ‘dangerous as a disease’ says UNICEF chief

Security Council renews Central African Republic arms embargo

COVID-19 has laid bare the cracks in long-term care. Here’s how to fix them

Ukraine turns again to the EU for more money

Commission introduces surveillance of imports of bioethanol, and remains open to examining requests from other sectors

Correcting the “jitters” in quantum devices

Three reasons to be optimistic for the future of Asia

Measuring consumer confidence isn’t useful anymore. Here’s what we should do instead

Stakeholder capitalism is urgently needed – and the COVID-19 crisis shows us why

Why we need artists who strive for social change

This is what great leadership looks like in the digital age

At global health forum, UN officials call for strong, people-focused health systems

These clothes were designed by artificial intelligence

Scientists just got closer to making nuclear fusion work

Meeting the basic needs of our healthcare workers

Gender Science: A sneaky healthcare risk factor

Scotland and First Minister Salmond enter the most challenging battlefield for independence: Europe

UN rights chief ‘appalled’ by US border detention conditions, says holding migrant children may violate international law

Why the Fourth Industrial Revolution could spell more jobs – not fewer

JADE visits Lithuanian Junior Initiatives

Refugee crisis update: EU still lacks solidarity as Hungary and Slovakia refuse to accept EU Court’s decision

European Commission: the LED lights of your Audi A6 shall save our planet

How has technology changed – and changed us – in the past 20 years?

Chart of the day: Why marine protected sites matter more than ever

Secure 5G networks: Commission endorses EU toolbox and sets out next steps

Fact-checking Day: Fighting the virus of disinformation on Covid-19

A Glimpse into the Future of the Health with Mobile Technology

Most US students aren’t learning about climate change. Parents and teachers think they should

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s