Eurozone at risk of home-made deflation and recession

Pierre Moscovici, Member of the EC in charge of Economic and Financial Affairs, Taxation and Customs, gave a press conference on the Winter European Economic Forecasts for 2014, 2015 and 2016. (EC Audiovisual Services, 05/02/2015, Brussels - EC/Berlaymont).

Pierre Moscovici, Member of the EC in charge of Economic and Financial Affairs, Taxation and Customs, gave a press conference on the Winter European Economic Forecasts for 2014, 2015 and 2016. (EC Audiovisual Services, 05/02/2015, Brussels – EC/Berlaymont).

Tomorrow Tuesday, 5th April, the European Commission will present its ‘Spring European Economic Forecast’ including assessments and predictions about GDP, inflation, employment and government finance for 2014, 2015 and 2016. Good providence made sure that last Thursday Eurostat released its flash estimate of April inflation standing at the edge of zero percent, up by an insignificant decimal point of one percentage unit in relation to the March figure of – 0.1%. Theoretically, this is a step towards the right direction, possibly indicating that Eurozone has abandoned the mine field of the negative inflation (deflation) region.

However, this meager change of the inflation rate would constitute a shallow base if the Commission uses it to beautify the prospects of the European economy. One decimal point of a percentage unit is actually nothing compared to the formal inflation target of something less than 2%. This benchmark has been set by the European Central Bank, as being the optimum rate of change of consumer prices. The fact that inflation stood at zero from the negative part of the chart is no kind of consolation. It can turn again downwards any time.

Falling prices

Let’s see why this is not just a prophesy. Eurostat’s data ascertain that the services price index follows a long-term downward trend (April 2014 1.6%, November 2014 1.2%, January 2015 1%, March 2015 1%, April 2015 0.9%). If the prices of services continue dropping, following this twelve month old downward tendency, then at any moment in the immediate future, Eurozone can return to the negative part of the inflation chart. The services are the largest single sector of the economy and carry a massive weight on the overall consumer inflation, accounting for 434.7 thousandths (434.7/1000). There is more to it.

Until now the negative inflation figures could be attributed almost entirely to the exogenous factor of the falling prices of oil and energy in general. If however the services index continuous on this downward course, Eurozone may find itself in a dreadful fully home-made deflationary trap. So the EU Commission has nothing to celebrate over inflation having stood at zero. Let’s dig a bit deeper in that.

What recovery?

The much advertised recovery of the European economy, as it statistically appeared with an increase of just a few decimal points of the GDP in the second quarter of 2013, is now about to enter in its third year. Yet, it still remains not only fragile, but there are strong signs from the persistently very low or negative inflation, that growth remains pretty uncertain. The internal drivers of growth like investments and consumption are always subdued and the only positive support comes from exports. But the rest of the world doesn’t seem capable of continuing to cover for Europe’s shortcomings due to the collapse of oil and raw material prices.

That’s why the Governing Council of the European Central Bank overcame the objections of Germany and embarked on a strong quantitative easing program. Under this new scheme the ECB has undertaken to print and distribute €1.14 trillion in eighteen months, through purchases of government bonds and asset backed securities. Obviously, the target is that this cash bonanza sets the economy in motion. The program started this March with an injection of €60 billion through purchases of government bonds and asset backed securities. It will continue injecting the same amount of freshly printed money every month until September 2016.

Money only for the bankers

In short, the only positive factor that currently functions well in Europe is ECB’s money printing machine and of course this doesn’t pertain to the real economy. This extra cash is primarily and exclusively pocketed by the financial sectors, and only in a second or third stage the banks are supposed to pass a part of this bonanza to the real economy, by granting loans to businesses and consumers. Quite predictably the banks will use large parts of this money to play their own risky games in the derivative and other perilous markets. Only then the lenders will start to contemplate if the loans to producers and consumers make any sense for their balance sheets.

Unemployment at crisis levels

Coming back to the x-ray of the real economy, Eurostat found that unemployment in Eurozone was obstinately stuck at 11.3% in March, stable in comparison with February and only four decimal points down from March 2014 (11.7%). Needless to say, that those few decimal points fall well into the region of statistical error. Understandably then, unemployment remains at record levels equal to the crisis levels. To be reminded that the euro area unemployment rate at the peak of the last crisis in 2012 was estimated at 11.3%. No need to elaborate on the hideous rates of jobless youths.

Now let’s turn to Eurostat’s newly established research line focusing on household real income and consumption. Last Thursday Eurostat published for the first time ever the relevant data. It found that “In the euro area (EA18), in real terms, household income per capita increased by 0.1% in the fourth quarter of 2014, after an increase of 0.6% in the previous quarter. Household real consumption per capita increased by 0.1% in the fourth quarter of 2014, after an increase of 0.4% in the previous quarter”.

Households’ share shrinks

For one thing, real incomes and consumption amelioration looks like it has been fading during the last six months of 2014. Eurostat also published a very interesting graph showing the rate of change of real household income and consumption for the previous twelve years 2003 – 2014. The graph shows that all along that period the rate of growth of real per capita household income and consumption oscillated invariably around zero. This means that the per capita household income and consumption didn’t gain anything from the real increase of the overall GDP that actually happened all along that period.

Obviously, somebody else pocketed the economic gains of that whole era, further deteriorating the unequal distribution of income to the detriment of households. Not surprisingly then, every self-respecting economist from Janet Yellen, the Governor of the US central bank, the Fed, to the Nobel laureate Joseph Stiglitz all agree that the growing inequality of incomes is at the base of today’s problems of the Western economic volume.

All in all, tomorrow the European Commission has nothing to celebrate over the economic situation of Eurozone and the policies followed during the past decade. The fast growing inequality of incomes distribution is now about to test even the basics of the social contract on which the West has prospered after WWII.

the sting Milestones

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

Humanitarian aid: €24.5 million in Southern Africa and Indian Ocean region

Radio still a powerful worldwide tool for ‘dialogue, tolerance and peace’: Guterres

Cities are at the heart of our journey to net zero. Here’s why

UN chief condemns attack targeting international forces in northern Mali

Data capture, not disclosure, is the way to meet our climate goals

Data protection: Commission decides to refer Greece and Spain to the Court for not transposing EU law

President Juncker temporarily transfers portfolio responsibilities following departure of two Members of the European Commission

The world needs carbon-neutral flying. Here’s how to bring it one step closer

Two major EU projects falter; the Schengen Agreement now freezes and Eurozone fails to resolve the Greek enigma

How to build public trust in a sustainable energy future

Consumer protection: Commission welcomes political agreement by Council on the Representative Actions Directive

Sustainable transport can’t just depend on batteries. Here’s why

Conference on the Future of Europe: preparations continue

Global initiative launched to keep top sports events safe from terrorism

With security improving in DR Congo’s Kasai, thousands of refugees head home from Angola

EU long-term budget deal must be improved for Parliament to accept it

New energy Projects of Common Interest for the Energy Union built on European solidarity

How leaders can use ‘agile governance’ to drive tech and win trust

Trump’s self-centered politics unravels

Trump ostracized by his party and world elites but still remains in course; how can he do it?

Commission launches new edition of the Cultural and Creative Cities Monitor 2019

How we can win the war against antibiotic resistance

‘Maintain calm’ and ‘exercise patience’ UN envoy urges, as Nigeria heads to polls

The Recruitment of Children as Soldiers Explained

‘The time for action is now’ senior UN peacekeeping official says, urging support for regional force combating Sahel terrorism

Eurobarometer: Not a single answer about what the Banking Union will cost to citizens

LGBTQ+: The social evolution of a minority

What is ‘circular denim’ and why are top brands redesigning jeans?

‘Abhorrent’ ambulance attack in Libyan capital imperils life-saving work, warns UN

Removing deadly mines means ‘new horizons and hope’, clears a path to SDGs, says UN chief

FROM THE FIELD: Murals help heal wounds of bloody conflict in Guatemala

EU mobilises international donors to support Venezuelan refugees and migrants and countries in the region

Resolving Israel-Palestinian conflict, ‘key to sustainable peace’ in the Middle East: Guterres

Combatting terrorism: EP special committee calls for closer EU cooperation

This ceramic ink can 3D-print bones directly into a patient’s body. Here’s how

Tanzania’s Dual Burden

5 insights to guide ASEAN’s digital generation in a post-pandemic world

Children suffering ‘atrocities’ as number of countries in conflict hits new peak: UNICEF

Ageing: Looming crisis or booming opportunity?

UN mourns death of former Secretary-General Kofi Annan, ‘a guiding force for good’

Turkish and Greek Cypriot leaders ready for talks with UN chief on improved relations

Eurozone: Economic sentiment-business climate to collapse without support from exports

Can climate change wait for the US to rejoin the Paris agreement?

MWC 2016 LIVE: Gamelab founder talks Apple TV, VR and monetisation

We need to talk about mental health at work, say employees

Hungary: Commission takes next step in the infringement procedure for non-provision of food in transit zones

This is the ever-changing state of the world’s top cities

Women outliving men ‘everywhere’, new UN health agency statistics report shows

How to outsmart bias when you’re recruiting

Hackers can use public USB chargers to steal personal data. Here’s what you need to know about ‘juice jacking’

EU integration: MEPs want to end permanent opt-outs from EU law

5 things you need to know about water

FROM THE FIELD: Persons with disabilities bike towards sustainability

‘Everyone must be on board’ for peace in Central African Republic: UN’s Lacroix

Commission launches debate on a gradual transition to more efficient and democratic decision-making in EU tax policy

Meet the man who drove from the Netherlands to Australia without visiting a gas station

Building a Climate-Resilient Future – A new EU Strategy on Adaptation to Climate Change

UN study projects $32 billion loss for UK post no-deal Brexit

IMF launches a new offensive against Germany

‘Antagonistic gestures and accusations’ drown out Kosovo dialogue hopes, Security Council hears

More Stings?

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

%d bloggers like this: