http://www.economist.com/blogs/freeexchange/2014/01/deflation-euro-zone-1
As of recently, the euro-zone has been in danger of going into deflation. With the average inflation rate being a mere 0.8%, a continuing decline in said rate would be detrimental to the economy.
Two of the effects to economies undergoing deflation are discussed in this article. However, the euro-zone is currently only threatened by one. Debt contracts and long-term bonds were made while expectations for inflation were set to be around 2%. However, with inflation being so low, debt will increase by approximately 2% while income only increases by 0.8%, leading to less spending on needed goods and services and more spent on debt.
The euro-zone is in deep need of making policies to work towards ending deflation. However, with disagreement within the group of countries as to how to approach this situation, progress is not being made. Policies to increase inflation have been suggested, but Germany, who had experienced hyperinflation after World War I, has resisted these policies, afraid that history would repeat itself. With economies currently as unstable as Greece, Spain, etc., it is uncertain which policies will be most effective in fixing the problem at hand. Regardless, if nothing is done, economies in the euro-zone are sure to be in deep trouble.
In class, we talked about how deflation is something we do not look forward too. It is the period when inflation rate in below zero, which means that prices and consumption are decreasing. If this occurs for a long time, it will lead to high unemployment and debt. However, I have read some comments online, and some people disagree saying that deflation might be better for the economy because then it will find a new equilibrium for price and production. I found this really interesting and am curious to find out more about this subject.
ReplyDeleteI think that deflation is actually pretty good for the Euro Zone because they could really use the foreign investment to help boost the economies there. If deflation were to occur, prices would fall and this will attract foreign investment. This will help the Euro Zone as a whole. The only thing that the Euro Zone will have to worry about is the appreciation of the euro. The appreciation of the euro will happen in the long run and affect the foreign investment. This deflation worry is an interesting topic and perhaps not much of a worry at all, at least in the short run.
ReplyDeleteEurope's potential deflation is a very interesting probability. The theory of deflation would hold that the money supply and number of goods produced in the Euro-zone would decrease and settle on a new equilibrium. However, when we talk about "the Euro-zone" we should really be looking at the economic outliers which would actually experience deflation's full ramifications:Spain, Greece and Italy. These nations are highly leveraged, and the real burden of their debt would destroy their economies if deflation kicks in.
ReplyDeleteThe interesting thing about the deflation, too, is that its possibility is being discussed alongside the European baby-bust and population stagnation. Economies can't grow with stagnant demand and copious regulation. What happens will be very interesting, and thanks for the article.
Economists worry much more about deflation than inflation. Certainly when there is hyperinflation it can be seen as worse than mild deflation; but mild deflation is worse than mild inflation (which is actually healthy).
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