Half of Eurozone in deflation expecting salvation from monetary measures

From left to right: Wolfgang Schauble, German Federal Minister for Finance and Ioannis Stournaras, Greek Minister for Finance. Obviously they discuss what Greece and the other south Eurozone countries need most; growth (Audiovisual Services , ‘The Council of the European Union’).

From left to right: Wolfgang Schauble, German Federal Minister for Finance and Ioannis Stournaras, Greek Minister for Finance. Obviously they discuss what Greece and the other south Eurozone countries need most; Growth! (Audiovisual Services , ‘The Council of the European Union’).

Five Eurozone countries posted negative inflation rate in March (Greece (-1.5%), Cyprus (-0.9%), Portugal (-0.4%), Spain and Slovakia (both -0.2%), while the rate of change of consumer prices ranged between 0.1% and 0.3% in another four euro area members states during the same month. In almost all the rest euro area countries, March inflation appeared in lower levels compared with February. This is an infallible sign that the single euro money zone is already suffering from disinflation (falling rate), heading fast to the deflation region of negative consumer price evolution.

In detail, Eurostat, the EU statistical service, announced yesterday that the Eurozone twelve month inflation was 0.5% in March 2014 “down from 0.7% in February. A year earlier the rate was 1.7%. Monthly inflation was 0.9% in March 2014. European Union annual inflation was 0.6% in March 2014, down from 0.8% in February”. The same source reports that during the same month of 2013 inflation in the EU28 was 1.9%.

Alarmed policy makers

There is no doubt that policy makers in governments, the EU and the European Central Bank are alarmed with the prospect of Europe entering a deflation and recession trap soon. Mario Draghi the President of the ECB, speaking last weekend at the IMF and World Bank’s Spring meetings stressed “The rise of the single currency’s exchange rate is one of the main reasons Eurozone inflation is at a dangerously low 0.5%. A stronger euro would act as a trigger to looser monetary policy”.

The European Sting on 14 April reported meticulously, on the brave new monetary policies for growth Draghi announced in Washington, under the title “ECB: A revolutionary idea to revitalize the European economy with cheap loans to SMEs”. However, after the latest Eurostat Press release was published yesterday with estimations, that the inflation rate in half the Eurozone countries (nine of them) ranges between -1.5% for Greece and 0.3% for Italy, things take a much more urgent character.

Deflation is here

Deflation is not any more a future threat, but a real trap for half the Eurozone countries. In the rest of them the rate falls rapidly towards zero. Obviously the main reason of the continuous fall of inflation is the constant rise of the euro with the rest or major world currencies. As Draghi pointed out, “A stronger euro would act as a trigger to looser monetary policy”.

The problem is though that the euro has already attained unbearably high levels for at least half of the single money zone countries and the ECB has done nothing, at least so far. Only Germany can survive with the euro so hideously expensive as to trade for 140 American cents. At that parity levels all the other European countries are in recession or near to it. This means that the ECB should have already undertaken action with more accommodative monetary policies and extraordinary measures. Understandably Germany must have been blocking monetary easing and extraordinary measures to support growth and arrest the rise of the euro. There is positive indication though that this must have changed.

In any case though, acting ‘behind the curve’ is not the best way to counter deflation and recession in the entire southern part of the single money zone. It seems that this is the reason that the ECB is now contemplating more direct measures to support the SMEs, which constitute the back bone of euro area productive machine and jobs supplier. ECB’s plan goes like that: “prime quality Asset Backed Securities (ABSs) could be bought by long-term investors, like insurance companies and pension funds, and thus refinance the lenders and the lenders in their turn accord more loans to SMEs”.

Time to save the SMEs and the euro

Unfortunately this is easier said than done. Reviving the ABSs market is not at all a simple endeavor. More so, if those bank ‘assets’ to be securitised and offered to investors, are SMEs loans. Nevertheless, whatever the difficulties in this direction, the truth is that there is no other way to avoid the deflation and recession trap now, after letting half of Eurozone to have reached its economic, social and also political limits of endurance. The governments of Greece, Italy, Portugal even of France are not at all at ease, and their endurance presumably has an expiration date. Francois Hollande, the French President, was just forced to try a complete government reshuffle. If the new Prime Minister Manuel Valls fails to deliver the difficult combination of growth and fiscal tightening at the same time, the creditworthiness of France may be downgraded.

All that said the ECB has to act soon and it has better be an era changing monetary policy package, as it was the case in September 2012, when Draghi told the world, that the “central bank will do whatever it takes to save the euro”. To paraphrase this quote ‘the ECB must do whatever it takes to save Eurozone’s SMEs and along with them save the euro money itself’. Capital markets seem to have been convinced that the ECB will do all that and investors have already started refinancing the lenders.

 

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