Friday, July 2, 2010

Deflation: A serious concern for Europe !!

You must have come across the news of countries going bankrupt as a result of hyperinflation, for example Zimbabwe which suffered from a 24000% inflation and it's currency became almost valueless, even less than the value of paper. Deflation can be equally killing. Deflation has a unique spiral effect. It occurs when there is a shortage of money supply in the market. Thus people have less disposable income to spend and there is a decline in the demand for products which in turn results in unemployment and further reduction in incomes and so on. It has the potential of bringing an economy to a halt. Japan is a good example of a country under deflation since many years which has resulted in a fall in the GDP of Japan and we see many countries surpassing Japan in terms of output growth.
European Central bank has a primary responsibility of keeping inflation under control. But it has become so obsessed with this task that it is ignoring a greater threat at it's disposal: DEFLATION. Economists regard deflation to be more serious than inflation. It is also bad for countries like Greece and Portugal which are under debt pressure to repay as deflation makes the currency more valuable. Most countries argue that they need to cut the money supply in order to reduce their deficits but what is the need of the hour?.The real challenge for policy makers will occur in the coming months and years as Spain, Greece and Portugal struggle to regain their competitiveness on international markets. Without their own currencies to devalue, they have little choice but to cut wages and keep them well below those in countries like Germany and France. Pay cuts and lower government spending will put downward pressure on prices. Spanish core inflation already turned negative in April. A mild decline in prices in a few euro zone countries can be managed, economists say, but it will add to the risks of deflation.And the central bank will face more difficulty than usual in devising a monetary policy that fits both the ailing countries and the faster-growing economies like Germany and France.


  1. Lets start a discussion here on Inflation v/s Deflation !!

  2. To understand the situation in which economies are now must take into account several issues. On the one hand it is noted that, as often happens with almost every economic problem, the lower prices is not bad in itself. It may be surprising to know that the country is now truly deflationary, even a little more than Japan, is China. Their prices fell 0.7% in 2002 but its gross domestic product grew more than 8% and industrial production more than 13%. This case serves to demonstrate that what is bad is the fall in prices, especially when it is really so small, but it is accompanied by sluggish production, less growth and investment.

  3. I am saying deflation will come the last 5 years. We will have the same situation like in Japan after the property collaps (20 years ago). The bill is not paid yet ... for Collateralized Debt Obligation (CDO) ...

  4. China will need a reason — other than international pressure — to let its currency appreciate.

    The G3 must respect all countries and reject any war which destroy money in air