Goshen News, Goshen, IN

Local News

November 17, 2013

What's holding the eurozone recovery back?

(Continued)

“There’s no reason to be joyous,” said Bob Gogel, CEO of Integreon, a global legal outsourcing firm.

Deflation?

One offshoot of high unemployment is that it keeps a lid on wages. That affects a household’s ability to spend, especially in a time of austerity — tax increases in many indebted countries are already a drag on income.

As a result, shoppers are putting off big purchases and looking for bargains. Retail sales have yo-yoed in recent months, despite the emergence from recession.

That’s caused retailers to lower prices to lure more buyers, leading to a drop in inflation. At last count, consumer price inflation was just 0.7 percent in the year to October, far below the 2 percent target.

While lower prices are, in theory, good for consumers, there is the risk they could encourage shoppers to put off purchases in the hope of getting better deals at a later date. Such a downward spiral of dropping prices and weaker spending — called deflation — has blighted Japan’s economy for the best part of two decades.

Few economists see a risk of deflation. But the European Central Bank doesn’t appear willing to take any risks — last week it cut its benchmark interest rate to a record low of 0.25 percent. It has indicated it stands ready to take other measures — such as more cheap loans to banks or pumping money into the economy — should inflation fall further in the months ahead.

Strong Euro

Even though the eurozone has been in a financial crisis and in recession for much of the past five years, the euro has remained fairly buoyant, especially since last year’s commitment by the ECB to do “whatever it takes” to save the currency.

In fact, it’s spent much of the past five years trading above its long-run average, particularly against the dollar, which has been weakened by the Federal Reserve’s policy to pump trillions of dollars into the U.S. economy. The ECB has refrained from any such monetary stimulus and that’s helped shore up the euro — even when many commentators were forecasting its demise.

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