With our high level of household debt, we'll suffer if deflation spreads across eurozone
Ireland's fate is bound up with Europe's. The European Commission's spring forecasts for the eurozone are not looking good, and that is bad news for us. Only Europe's authorities can claim a recovery is under way with low inflation expectations and higher than expected unemployment, with growth expected to be barely above 1pc. Averages don't mean much in an 18-country monetary union, so looking at individual countries, we can see evidence the eurozone's member states may be experiencing elements of a deflationary spiral. In Germany, Estonia, Hungary, Greece, Cyprus and Ireland, consumer prices fell on a year-over-year basis in 2013.
Yet the European Commission's argument that deflation is not a real risk is that it is unlikely to take place in the larger core economies. From page 25 of the Spring Forecast: "The risk of outright deflation, defined as a generalised and self-reinforcing fall in prices in the euro area as a whole, remains low. For such a scenario to materialise, inflation would have to drop sharply to almost zero in the core countries of the euro area. Shocks that would trigger such a drop in core inflation are very unlikely."
Of course the commission doesn't outline exactly what those shocks might be; and worse, the argument from the commission is oddly circular. We won't see deflation because we don't see very low inflation figures in the bigger countries.