Eurozone: Inflation plunge to 0.4% in July may trigger cataclysmic developments

Press conference by Siim Kallas, Vice-President of the European Commission, on the spring 2014 economic forecasts. (EC Audiovisual Services, 05/05/2014).

With inflation in Eurozone falling last month to crisis level nadir and a new business investments retreat, it is easily understandable why unemployment is still exploding at double-digit highs. As a matter of fact, at the end of last month Eurostat, the EU statistical service published its estimates for the above mentioned crucial variables, which measure and underscore the immediate threats to euro area economy. It may be true that the European Central Bank has undertaken a new program to support the real economy and the SMEs, promising up to one euro trillion in liquidity injections, but this will take months if not years to give any tangible results. In the between the economy, at least in many member states, may well cross the line, from recession to the high risk area. Let’s take one thing at a time, starting with inflation.

On Thursday 31 July, Eurostat publicised its first estimate for the same month inflation rate. The relevant passage of the Press release issued by the EU statistical office read like this, “Euro area annual inflation is expected to be 0.4% in July 2014, down from 0.5% in June, according to a flash estimate from Eurostat, the statistical office of the European Union. Looking at the main components of euro area inflation, services is expected to have the highest annual rate in July (1.3%, stable compared with June), followed by non-energy industrial goods (0.0%, compared with -0.1% in June), food, alcohol & tobacco (-0.3%, compared with -0.2% in June) and energy (-1.0%, compared with 0.1% in June)”.

Need for some inflation

Undoubtedly, the most alarming of the new statistical figures (on inflation, unemployment and investments) posted by Eurostat on the last day of July, refers to inflation or the almost complete absence of it. For five years now, after the breakout of the still ranging credit crisis, the world economy learned to appreciate the existence of some inflation pressures. On the contrary, until the turn of the Millennium, price rises of double rates were the standard problem. Economists and the business community had then almost forgotten the disinflation (barely rising or stagnant prices) and deflation (falling prices) risks.

It took the credit crunch and the subsequent real economy downturn for everybody to acknowledge that Europe suffers from falling inflation. Not to forget that disinflation is haunting mainly the European economy, while in the US consumer price developments pose no problems. As for the developing world, inflation pressures are still a problem but not a major one, probably at the exception of Argentina, where annual rates of price hikes stretch up to 54%. Understandably, the reason for this Eurozone solitary path to deflation is the restrictive fiscal policies, the incomes austerity and the denial of the ECB to apply quantitative easing in its monetary strategy. As everybody knows, Germany is the main force behind this deflationary policy mix.

Looking for a new dogma

Clearly this Teutonic dogma has led the unemployment rates to double-digit levels, haunting more than half Eurozone countries. The sociopolitical repercussions of the unseen before jobless numbers are already at the point of crossing to the area of no return. Extremists in both ends of the political spectrum and Eurosceptic groups have gained importance and weight. They now substantively threaten the internal stability and the international position of large and important countries like France, Italy, Spain, Greece, Portugal and many others.

Also on Thursday 31 July, Eurostat announced its estimate of the unemployment rate. The germane passage is the following: “The euro area (EA18) seasonally-adjusted unemployment rate was 11.5% in June 2014, down from 11.6% in May 2014, and from 12% in June 2013. This is the lowest rate recorded since September 2012. The EU28 unemployment rate was 10.2% in June 2014, down from 10.3% in May 20144, and from 10.9% in June 2013. This is the lowest rate recorded since March 2012. These figures are published by Eurostat, the statistical office of the European Union”.

Unemployment always a threat

The good people of Eurostat note that those rates are the lowest recorded since 2012. From their point of view, being accomplished statisticians and mathematicians, this observation may be true. Yes, June unemployment rate was one decimal point below May, making it the lowest rate of the last two years. In real life though what is mathematically correct may be of no significance at all. One percentage point less unemployment, even if it is 100% accurately estimated, has no macroeconomic or political meaning. The truth remains that “In June 2014, 5.129 million young persons (under 25) were unemployed in the EU28, of whom 3.319 million were in the euro area”. Unfortunately, the economic and political implications of this fact can’t be expected to become more lenient, after a decimal reduction of the unemployment rate.

A drop in investments

Last but not least, more bad news stems from the business investment front. The same source reveals that “In the first quarter of 2014, the business investment rate was 19.3% in the euro area, compared with 19.5% in the fourth quarter of 2013. This fall was the result of investment decreasing (-0.8%) and gross value added increasing (+0.2%). Total stocks (materials, supplies and finished goods) fell for the second quarter in a row”.

In this case the net fall was not just one decimal point but nearly an entire percentage unit. Manifestly, investments decreased by 0.8% during the first quarter of this year in relation to the three last months of 2013. This is not a trivial thing. This fall of investments is of a great significance, with important implications for employment. Todays’ investments are the future work positions, which will be obviously reduced. This fact can thus supply a good base to predict a new increase of unemployment during the coming months.

Alarming statistics

During the past four to five years Eurostat keeps producing alarming statistics. This time however, the announcement of a new drop of inflation rate to 0.4% in July from 0.5% in June has an extra weight. It strengthens the argument that Eurozone may end up in the deflation part of the graph. Alas, if it comes to this, the cost of reversing the catastrophic sequence may be unbearable. Hence Eurozone decision makers must be proactive and do whatever it takes to save Europe from this dreadful eventuality.

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