Eurozone: In vicious cycle of disinflation and unemployment?

Eurostat, the EU statistical service, announced late yesterday evening that in December unemployment remained at the persistently high level of 12% since October, while inflation took a new downwards turn to 0.7% in January, from 0.8% in December. It’s difficult to say which one of the two developments is more alarming. On both accounts Eurozone has become the target of strong criticism from international economic organisations like the IMF and OECD. In any case, the new decrease of the inflation rate justifies those who fear that Eurozone runs the risk of ending up in the negative part of the chart, where deflation (negative inflation) would threaten all euro denominated values. ECB’s President Mario Draghi has repeatedly warned that inflation is bound to remain at very low levels for a long time, far away from central bank’s target, set at below but close to 2%. This persistent tendency of disinflation (falling inflation) has attracted heavy criticism on the grounds that Eurozone doesn’t do enough to support internal demand and thus lead its own economy out of recession and the world to a higher level of growth. The IMF and the US are warning Europe about that for a long time. Falling inflation In detail now, Eurozone inflation rate in January fell because of a new retreat of energy prices. Eurostat stated that energy prices are estimated to have fallen by 1.2% during the first month of the year. However, a more close reading of the inflation components as published by Eurostat, reveals that prices of ‘Non-energy industrial goods’ in January were increasing with a mere 0.2%, down from 0.3% in December. This category of goods represents the heart of every developed economy and developments there monitor the deeper long-term tendencies in its productive structures. Consumer goods price developments in the sectors of ‘Food, alcohol & tobacco’ and ‘Services’ are influenced by factors like, taxation, weather conditions and administrative and trade regulations, which do not represent the real conditions in the productive apparatus. In short, the news coming from the ‘Non-energy industrial goods’ sector are more alarming than the developments around the overall inflation rate. Unemployment ogre Passing to the unemployment ogre, the unacceptably high overall 12% doesn’t tell the whole story. Among the Member States, the lowest unemployment rates were recorded in Austria (4.9%), Germany (5.1%) and Luxembourg (6.2%), and the highest in Greece (27.8% in October 2013) and Spain (25.8%). According to Eurostat “Compared with a year ago, the unemployment rate increased in fourteen Member States, fell in thirteen and remained stable in Sweden. The highest increases were registered in Cyprus (13.9% to 17.5%), Greece (26.1% to 27.8% between October 2012 and October 2013), the Netherlands (5.8% to 7.0%) and Italy (11.5% to 12.7%)”. As it is easily understood, increasing unemployment doesn’t only haunt the ‘usual suspects’, but also core Eurozone economies like Holland. Still, the main policy lines in the euro area remain restrictive. Austerity always reigns in the entire Eurozone, and countries like Greece, Portugal and Italy are confronted with critical political destabilisation and social unravelling. Unfortunately, it seems that despite the fact that the political situation has entered the accident prone area and the social tissue is torn to pieces, there are no signs of policy change. Not even the zeroing of deficits, in the fiscal front and the foreign account in member states like Greece, Italy and Spain don’t seem enough to bring about a policy U-turn, from austerity to growth supportive measures. All in all, it’s unclear yet what it takes to change the minds of Eurozone’s policy makers in Berlin, Paris and Brussels.