ECB to play down IMF’s alarms for deflation danger in the EU

Peter Praet, Member of the Executive Board of the European Central Bank (ECB) in the festivities to celebrate the enlargement of the euro area to include Lithuania (EC Audiovisual Services, 23/07/2014)

Peter Praet, Member of the Executive Board of the European Central Bank (ECB)
in the festivities to celebrate the enlargement of the euro area to include Lithuania (EC Audiovisual Services, 23/07/2014)

It was last Tuesday when Peter Praet, Member of the Executive Board and chief economist of the European Central Bank (ECB), reported to two Belgian newspapers that there is limited risk of price deflation in the euro area.

The Economic Sentiment Indicator (ESI) in the euro area and in the EU gained momentum after four stagnant months. Peter Praet referred to this to support his argument of no recession concerns. He also alluded to the contribution share of the EU member states and especially Germany’s in the battle against low inflation and growth.

No deflation in the horizon

The ECB is highly concerned about the chance of observing negative inflation figures. In order to avoid this and raise the inflation rate close but below 2%, several measures of loosening the monetary policy have been implemented.  Peter Praet stated in the interview: “a prolonged period of low inflation harbours the risk that an economic shock may trigger negative inflation. If you’re hovering close to zero and you experience a new shock, the risk of negative inflation is by no means negligible.”

However, it seems that the ECB’s official is not significantly worried about a possible price deflation and expresses his lack of understanding regarding the high deflation probability (30%) in the euro area that is reported by the International Monetary Fund (IMF).

Probably the models that the IMF use to calculate this probability are overestimating some factors in comparison to ECB’s ones. One of these factors could be the falling oil prices, which is linked to low inflation. Besides, oil prices have decreased a lot during the past months and will continue this down-slope according to Goldman Sachs’ 2015 forecast report.

Economic sentiment rises again

October brought beneficial economic signs for both the euro area and the EU. The ESI which is composed of five confidence indicators (Industrial, Services, Consumer, Construction and Retail trade) increased in the euro area from 99.8 to 100.7 and in the EU from 103.5 to 104.0. More specifically, the rise of the ESI in the euro area was due to high confidence levels in all sectors.

The countries that faced the highest changes were Spain with a 0.7 decrease and the Netherlands with a 2.1 increase.  On the other side, the sectors that contributed to the increase of the ESI in the EU were the industry, services, consumers and construction. The EU retail trade confidence indicator reported a decrease.

In addition, the ESI dropped in the United Kingdom by 2.1 whereas it increased by 2.9 in Poland. All in all, there are positive signs that indicate no further recession worries, but are not enough to drift the growth momentum up.

Germany should spend

The biggest European economy, Germany, has great responsibility regarding inflation and growth rates in the EU. The zero public deficit also well-known as the “black zero” is Germany’s 2015 target. However, merely focusing on fiscal consolidation is not promoting growth as investment measures do.

Thus, this target should be restated by the Dutch government which could boost EU growth by aiming more at investments. The latter was also supported by Peter Praet who said: “Germany has some room to relax its fiscal policy without jeopardising stability in the medium term. It can use that scope to step up investment.”

Inflation & growth: a target for ECB and EU

The low inflation and growth rates should not only be ECB’s but also EU member states’ concern. The fact that the ECB is remaining vigilant and keeping on implementing further measures to provide the market with liquidity and face possible deflation should not be reassuring for the EU economies.

The restructure of their economies, something that is happening at a very slow pace, is crucial in the recession or even extinction of the aforementioned problems. Therefore, each and every EU country needs to take their respective share of responsibility according to their economic power.

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  1. […] er så stor, at randområdets problemer let kan blive et aggregeret problem. IMF vurderede i oktober, at der er 30% sandsynlighed for aggregeret deflation i Eurozonen. For alle lande gælder, at realrenten vil stige […]

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