Low Inflation Worries the Euro Zone
Prices in the 17 European Union member states that were
using the euro in 2013 have risen in December at an annual rate of only 0.8
percent. The European Central Bank seeks to keep price growth steady at about 2
percent. Europe is experiencing disinflation and if the rate of inflation keeps
falling, Europe could face outright deflation. Deflation increases the real
value of debt and may aggravate recessions and lead to a deflationary spiral
(decreases in price lead to lower production, which in turn leads to lower
wages and demand, which leads to further decreases in price). While an increase in the purchasing power of
one’s money benefits some, it amplifies the sting of debt for others. After a
period of deflation, the payments to service a debt represent a larger amount
of purchasing power than they did before deflation.
While most people believe that deflation is good because their money is worth more, it really is quite bad. So many other problems arise. The other worrying part of this is the the European Central bank has run out of options to help.
ReplyDeleteObviously this issue has become very prominent within Europe, and action needs to be taken in order to help fix it and provide a solution. Are any government solutions being implemented, or do they have a plan of action to counteract this deflation they are experiencing?
ReplyDeleteObviously to help this problem inflation must occur. Europe needs to inflate but not so much that it causes problems with inflation; then they'll have a double whammy sort of event happening.
ReplyDeleteDeflation is just as bad as Hyperinflation to me. They need that little bit of inflation to get economies the jump they need but I'm sure they are scared of causing hyperinflation by trying to get rid of the deflation to fast. Like Lindsay said, the government really needs to be trying to find solutions which I'm sure they are but it seems like they are running out of time.
ReplyDeleteWe also cannot forget that as an increasingly global economy, our fate is tied into that of other countries and economic groups, particularly the EU. A downward spiral there could cause many unanticipated ramifications here.
ReplyDeleteEurope needs to have some inflation to bounce back from all of this deflation. Or it could end up effecting the US, like Alex mentioned.
ReplyDeleteAlex is right, whatever happens in Europe will have repercussions around the world including the United States. Since the Eurozone is already recovering from a crisis, sinking into deflation could be devastating to those countries, and indirectly, to us.
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