Tags: Wolf | eurozone | risk | deflation

FT's Wolf: Eurozone Still at Risk of Deflation

By    |   Wednesday, 12 Mar 2014 07:58 PM

While some financial commentators say the danger of deflation in the eurozone has ended, Financial Times columnist Martin Wolf disagrees.

In the year through February, eurozone inflation totaled 0.8 percent. "This is hardly close to 2 percent," the European Central Bank's target, Wolf writes. "It is also highly dangerous."

The low inflation has been accompanied by sluggish demand, he notes. Real eurozone demand in the fourth quarter of 2013 stood 5 percent below the level prevailing in the first quarter of 2008.

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"The failure to offset this [weak demand] has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment," Wolf says. "All this will deeply scar the eurozone."

As for prices, "there is an appreciable risk that the eurozone will fall into deflation," he writes. "The eurozone is just one negative shock away from deflation. The cushion is far too small."

You know you're in trouble when you need negative real short-term interest rates to prevent deflation, Wolf says.

"The eurozone crisis is not over," he writes. "Despite the emergence of a degree of stability, the situation remains very fragile."

Meanwhile, the eurozone reported Wednesday that industrial output unexpectedly fell 0.2 percent in January.

"Looking ahead, manufacturers will be hoping that improved confidence in most eurozone countries will encourage businesses to step up their spending on capital goods and component parts, and also encourage consumers to pick up their spending, particularly on durable goods," Howard Archer, an economist at IHS Global Insight, told Bloomberg.

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While some financial commentators say the danger of deflation in the eurozone has ended, Financial Times columnist Martin Wolf disagrees.
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2014-58-12
Wednesday, 12 Mar 2014 07:58 PM
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