EU: Eurozone risks Japan-style trap as deflation grinds closer

The Telegraph ^ | 4/30/2013 | Ambrose Evans-Pritchard

[bruinbirdman]

The eurozone is one shock away from a Japan-style deflation crisis after a key measure of prices fell to the lowest since the launch of the single currency.

The region’s core inflation rate – which strips out food and energy – fell to 1pc in March. This is far below expectations and leaves monetary union with a diminishing safety buffer.

“The eurozone is tracking the experience in Japan in mid-1990s. there is a very high risk of a slide into deflation,” said Lars Christensen, a monetary theorist at Danske Bank.

While eurozone core inflation was slightly lower in the aftermath of the Lehman crisis, the current figure is distorted by the one-off effects of VAT increases and levies linked to austerity. Adjusting for these taxes, the rate is now running at 0.4pc.

“The European Central Bank [ECB] should be concerned. If there is another severe shock, the eurozone faces a much bigger risk of falling into a deflationary trap,” said Julian Callow, global strategist at Barclays. “The danger is when deflation combines with high debt and deleveraging and becomes toxic. That raises the risk of a debt-deflation spiral. There are already signs of this in southern Europe.”

Mr Callow said nominal GDP – tracked by monetarists as the key indicator in sovereign debt crises – fell 1.8pc in Spain and 1.2pc in Italy last year. This means that the debt burden is rising fast on a contracting base.

David Owen, from Jefferies Fixed Income, said the mix of falling inflation and an ageing population risks pulling the eurozone into a “liquidity trap” where the self-correcting mechanisms of the economy break down. “This looks strikingly similar to Japan 15 or so years ago,” he said.

Mr Owen said the ECB cannot just “sit back and do nothing

[DemforBush]

The greater rift is with Paris, after the French Socialist Party lashed out at the Chancellor in a vituperative attack, blaming the deep social and economic crisis in Europe on the “selfish intransigence of Mrs Merkel, who thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future”.

I don't about you guys, but the first two items on that list sound pretty good to me. Of course a leftist would scoff at the notion that a leader should look after her own people first and foremost. Far more important to write big fat checks to people who screwed up their own finances, and all that.

[iopscusa]

Blame the Commies, Keynes and Dexter White.