Reports of the Survival of the Eurozone May Have Been Greatly Exaggerated !
- Reports of the survival of the eurozone may have been greatly exaggerated!
by Roger Bootle, http://www.telegraph.co.uk/
Last week’s surprise interest rate cut by the European Central Bank (ECB) was largely a response to the looming danger of deflation in the Eurozone.
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Just when you thought it was safe to go back into the water… Last week’s surprise interest rate cut by the European Central Bank (ECB) may have been taken as good news by the markets, but it was largely a response to the looming danger of deflation in the eurozone. And that is not good news at all.
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It is a severe problem of economic forecasting that if you manage to identify a major force that is going to have significant effects, you are rarely able to see quite when these will occur. You can give up, retire or die before the forecast events finally come to pass.
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The long-running crisis of the euro is a case in point. Like Mark Twain’s death, forecasts of the euro’s demise have proved premature. Yet at the heart of the simmering crisis lie two debilitating problems with the potential for a devastating interaction. The first is a loss of competitiveness by the peripheral countries, that has left them with depressed levels of GDP and high rates of unemployment. The second is appallingly high government debt.
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The response of the eurozone to the debt problem has been to enforce austerity in the form of cuts in government spending and increases in taxes. That has been successful in reducing the size of the deficits in the peripheral countries. The policy for regaining competitiveness has focused on so-called internal devaluation, whereby the peripheral countries force their inflation rates to low levels. Deflation – that is to say, falling prices – if it occurs, would simply be a continuation of this policy. The faster prices fall, the sooner the affected countries will return to full competitiveness.
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At first sight, it seems as though these two policies are consistent with each other. After all, the austerity drive helps price and wage increases to moderate because it depresses aggregate demand and releases resources, including labour.
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