Sunday 18 February 2018

Light at the end of the tunnel, but it is an oncoming train of crisis

Two years ago, we were promised a 'seismic shift' and a 'game-changer'. So what happened, asks Colm McCarthy

ECB chief Mario Draghi
ECB chief Mario Draghi
Financial markets.

COUNTRIES with heavy debts and deficits have an urgent interest in economic recovery: it would enhance tax revenues, reduce the pressure on social spending and thus help painlessly to close the budget deficit and stop adding new debt. They also have an interest in avoiding very low rates of inflation.

Debts are fixed in money terms. Even a modest rate of inflation erodes the real burden of debt. If Ireland and other troubled economies in the eurozone could experience economic growth at 2 or 3 per cent per annum, and inflation around the official target of 2 per cent, the sustainability of their debts would be greatly improved and the solvency of their banks would benefit too.

Unfortunately, the prospects for the eurozone do not correspond to this happy picture. Overall economic growth will be no more than about 1 per cent this year on the latest forecasts, lower and possibly zero in some troubled countries and the inflation rate is way below target, again close to zero in several countries including Ireland.

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