For the first time in the history of the euro, the Eurozone is experiencing deflation. Some attribute this to the severity of the slump and the timidity of the collective European response. Others, including the influential tandem of Merkel and Trichet, see it as a passing phenomenon and argue that exploding government indebtedness means that combating inflation should remain the primary goal of monetary policy.
The stakes are high. Should deflation prove persistent, it will add to the burden of the indebted, both public and private, and make recovery from the crisis increasingly difficult. But les jeux sont faits. The ECB seems highly unlikely to reverse its current diagnosis anytime soon. So we simply must wait and see what happens. (Note that the prices of key commodities, like oil, are rising again, so this deflation cannot be explained by falling prices of primary goods.)
Tuesday, June 30, 2009
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Not related to deflation but I thought you should see that:
http://www.lepost.fr/article/2009/06/30/1601297_attentat-de-karachi-les-doutes-de-magali-drouet-fille-de-l-une-victimes.html
Funnily enough, ECB spokesmen are saying that this isn't deflation, because energy prices (lower than a year ago) need to be stripped out of "core" inflation, which remains positive. Recent rises are being cited, however, as a reason not to worry ourselves that this is any kind of longterm problem. An example of how to say anything with statistics, I think.
By the way, I can see how Trichet and Merkel look like an "influential tandem" from a Paris vantage point. Both are unequivocal backers of the Maastricht orthodoxies of independent central banking and price stability, against the Gaullist push for "economic government". But from the rest of Europe, Germany seems to be more and more out of step with consensus opinion. Not that consensus opinion is necessarily right, but if you read Wolfgang Munchau recently on the new German balanced budget law, you'll see they've got him worried. Jürgen Stark is apparently banging away at a real hard line in the ECB governing council.
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