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Eurozone slips into deflation as Greece pressures ECB

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The Consumer Price Index has fallen below -0.2 per cent and, according to a Eurostat report, the Eurozone has slipped into deflation for the first time since October 2009.

“Greece and Spain have already been in deflation for months now (in the case of Greece for almost two years) and have been suffering from unemployment rates more than twice as high as the Eurozone average since mid-2011,” said Cebr economist Danae Kyriakopoulou. “In Germany, by contrast, unemployment has been on a downward trend and is now at a modest 6.5 per cent, while annual inflation is still positive at 0.2 per cent.

“This picture may seem puzzling to the eyes of the German taxpayers, who as the largest creditor to the European institutions are becoming increasingly fatigued by the Greek bailout saga.” 

But why are economic indicators in Greece still doing so badly five years on? After all, a solid €226.7bn had been sent Greece’s way. And Kyriakopoulou notes that they had even been given direction “of the combined economic expertise” of troika lenders such as ECB, EU and IMF.

It seems that only 11 per cent of the offered funds are actually being used to maintain “basic public goods and services”.

“More than half of the funds have gone back to the creditors in the form of repaying the debt and the interest associated with it, the think-tank reports,” explained Kyriakopoulou. “This strategy of austerity and refusal to reprofile Greece’s debt at the start of the crisis has been pointed at by the left-wing party of Syriza – who are leading the polls as the most likely winner of Greece’s next elections on 25 January – as the root of Greece’s failure to see recovery.”

But Greece isn’t the only “debt-ridden” economy. With recovery a far cry away for such countries, we’re waiting with bated breath to see what fiscal and monetary policies will be put in place in response.

“Due to their dire economic situation most periphery countries have little fiscal room to boost their economies through spending, and Germany has pledged to deliver a balanced budget this year,” said Kyriakopoulou. “The ECB retains a potential silver bullet in the form of quantitative easing still up its sleeve and ready to be launched. The central bank has a central target for consumer price inflation of 2.0 per cent.”

This certainly raises the pressure on the ECB to act. But Kyriakopoulou suggests that it is worth keeping in mind that the decline in prices was chiefly driven by a 6.3 per cent year-on-year fall in energy prices. 

“This is a ‘good type’ of deflation as it directly translates into a boost for consumers’ pockets. Given that the ECB has for so long resisted QE even while some countries were in ‘bad’ deflation, there may be little hope in expecting action now that deflation has spread to the rest of the bloc due to factors beyond its control. A softer take on austerity and the setting of both fiscal and monetary policies in expansionary mode are imperative to avoid another crisis.”

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