With our high level of household debt, we'll suffer if deflation spreads across eurozone
Published 06/05/2014 | 02:30
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.