Despite concern that the Eurozone may face a currency crisis due to fiscal deficits and mountains of government debt, deflation, not inflation, is the bigger threat right now.
Especially in Europe’s weakest economies:
Purchasing-manager surveys released Monday showed manufacturers in Spain, Greece and Ireland cut selling prices last month, continuing a trend in place for well over one year. In Greece, they fell at their fastest rate in eight months, “as heavy competition continued to restrain manufacturers’ pricing power,” according to Markit Economics, which compiles the data. Overall euro-zone manufacturing output picked up to a 30-month high in February, fuelled by exports and domestic restocking.
Consumer prices are already falling in Ireland. They risk doing so in Spain, many economists say, where unemployment is at the highest level in the euro zone. Consumer prices in Ireland are down 2.6% from a year ago, the biggest drop in the euro zone. Irish consumers’ spending is in retreat, after the country’s recession pushed the jobless rate up by almost two-thirds to over 13% at the end of 2009.
Miguel Ángel Fraile, head of Spain’s Confederation of Retailers, says 70% of retailers have cut prices in response to a 12% drop in sales last year. “We’ve had to reduce prices and margins,” as consumers become more demanding, says Mr. Fraile, whose association represents 450,000 small- and medium-sized retailers.
A collapsed housing bubble and high unemployment have created deflationary forces that so far appear to be overwhelming the inflationary forces of government stimulus, added government debt, and easy money within the Eurozone. Given the similar situation in the U.S., it’s as if most of the developed world risks turning Japanese these days.
Business Insider Emails & Alerts
Site highlights each day to your inbox.