Poor Eurozone Growth May Require Stimulus
The European economy is currently suffering from lower than expected inflation, and thus, lower economic growth. Prolonged inflation can damage a society by benefiting some parts of it while punishing the others. However Europe is now facing the risk of deflation. This is due to current lows in consumer demand paired with poor fiscal policy. Authorities are not tryigni to mitigate the negative side effects of long term low inflation. Chronically low inflation can depress Europe’s economic growth, which, in turn, can make repaying debts much more challenging. On the other hand, increasing the inflation rate can help Europe in many ways - it can help the Euro survive the current financial crisis, and may help countries like Germany to prosper.
Risks With High And Low Inflation
Manually controlling inflation can be counterproductive. Financial experts oppose keeping the inflation rate high for prolonged periods of time. High inflation can cause a country to lose control of its inflation rates, which can also cause companies to decrease or stop investing due to the market uncertainty that it comes with.
Very low inflation can also be dangerous, as this can cause both companies and consumers to stop spending while waiting for prices to return to normal. When both consumers and companies stop spending and investing, it can damage the country's financial situation. A slowed-down economy can make it difficult for a nation to pay down its external debt. Both Europe and the US have faced an economic downtime like this approximately a century ago, and Japan currently struggling with negative inflation. That is why it is important that Europe receive a stimulus.
Europe's Recent Experience With Changing Inflation
The overall inflation (headline inflation) within Europe went from negative levels in 2009 up to 3 percent in late 2011. The ECB used the fact that the inflation rate exceed expectations to validate their monetary stimulus polcies. However, the ECB believed that suggested economic policies would lead inflation to increase further than it did. The ECB also used high inflation rates to implement policies against decreasing the interest rates any further. Quantitative easing was opposed by the ECB. Quantitative easing occurs when a central bank buys some assets from the banks operating under its umbrella to take them of the bank's balance sheets.
During this period however, there were significant increases in the prices of goods inEurope, despite low inflation rates. Targeting headline inflation helps economists set expectations for both overall development and wage rises in the country. But headline inflation in Europe was recently seen at only 1.2%. This figure would have been even lower if there were no steps taken by the ECB to increase the inflation in the country. Today, the Inflation rate in many European countries is below or near zero. The prices of foreign goods and minimum wages paid by the companies have been decreasing constantly due to negative inflation rates.
The German Inflation Problem
Financial experts are now accepting that the rate of inflation is very slow in other European nations as compared to the inflation rate in Germany. These countries can increase the prices of their goods slowly as compared to Germany in order to bring competition back to the market. However, these countries also need inflation in order to erode the real value of their external debts, which would allow them to pay back their debts. With German inflation currently sitting at just 1.1%, this is a very difficult thing to achieve for rest of the European nations. The decreasing current account deficit in these countries might look like a good economic indicator, but it is primarily due to the current decrease in the demand for imports. The weakening domestic demand, followed by tough economic conditions are the major cause of decreasing imports in the European countries right now.