The euro-zone economy: Frost in spring

VIEWED from one perspective, the euro area is a minor miracle. Instead of collapsing in a heap, as seemed possible two years ago, the currency club is not just intact but has a new member, Latvia, which joined in January. An economic recovery has been under way since last spring and appears to be strengthening. But seen from another standpoint the euro zone is an accident waiting to happen. As inflation slips ever lower, a slide into Japanese-style deflation looks increasingly likely. That would raise an already onerous debt burden in real terms and pull down growth.The actions of the European Central Bank (ECB) will be crucial if such an outcome is to be averted. The ECB’s mission is to achieve price stability, and since 2003 it has interpreted this to mean an inflation rate over the medium term of “below but close to” 2%. Yet despite a fall in annual inflation to just 0.5% in March, the central bank was expected to hold its fire when its council met on April 3rd (after The Economist had gone to press). Previously, it had lowered the main policy rate to 0.25% in November.

One reason for the ECB to wait was that underlying…

Link to article:|fec

Leave a Reply

Your email address will not be published. Required fields are marked *