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Euro Area Slips Into Deflation

Euro Area Slips Into Deflation

The Draghi Bazooka has failed to deliver on its promise as the latest preliminary figures show that Europe has followed Japan into deflationary territory. Although many were eager to applaud the unveiling of the European Central Bank’s very own asset purchase program earlier in the year, so far the attempt at monetary easing has failed to yield the most important result: inflation. Then again, this confirms a widely truth that Central Banks do not wish to admit, namely that quantitative easing does not stoke inflation and is not a remedy for averting disinflation and deflation. Billions and trillions of dollars, yen and euros have been thrown at the problem, but the impact has been limited at best. Theoretically, adding to the monetary base by printing money and providing cheap funding for borrowers could stoke hyperinflation in certain cases as evidenced by Weimar Germany and modern day Zimbabwe. However, even the most aggressive monetary policy measures which have turned economies on its head have failed to product demonstrable gains in inflation.

EUR/USD

Today’s revelation that annualized CPI for the aggregate Euro Area slid to -0.10% on expectations of flat lining at 0.00% is true to the point that monetary stimulus measures have limitations in restoring growth and inflation. The main item missing from the discussion that proves critical in determining the outlook for the region remains fiscal policy, which is formulated on the part of governments and not central banks. In the case of Europe, this becomes all the more difficult due to the competing interests within the EU. The Union imposes caps on borrowing and national budget deficits, yet fails to centralize fiscal stimulus measures, compounding the problem. While the one meager benefit of weakening the euro might be enough to impress the vast majority of skeptics, in truth, this impact is merely transient. Europe will not be able to export its way to growth and competitive devaluation remains only a near-term remedy to longer-term structural defects. Nevertheless, putting a dent in Euro strength remains the primary driver of ECB policy as structural and fiscal reform remains elusive.

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