Strategic Briefing | 12.13.13 | Deflation Risk In Europe

Europe’s economic crisis could be mutating again
Barry Eichengreen (The Guardian) | Dec 10
Deflation could be replacing debt as the main problem – and there’s nothing to suggest the ECB is up to the job.

Is Germany Holding Europe Back?
The Financialist | Dec 12
The ECB has already cut rates from 0.5 percent to 0.25 percent and talked up its other deflation-fighting policy tools. But Germany is a critical piece of the puzzle. Part of Europe’s current deflationary risk stems from the fact that the region’s healthiest economy has acted more like a relatively poor, indebted southern European nation than the only one large and strong enough to give the euro zone a hard shove forward. Case in point: Chancellor Angela Merkel’s cabinet signed off on a €50 billion stimulus package in 2009, but the very next year, politicians approved a budget that slashed government spending by €80 billion over four years. Such fiscal tightening is a big reason that domestic German demand has been lackluster over the last four years. Germany’s own inflation rate was only 1.6 percent in November, though that was an improvement over October’s 1.2 percent annual rate.

Message to the Euro: You’re Flying Too High
The Wall Street Journal | Dec 12
The absurdity of the euro’s valuation has been as apparent as ever this week as it briefly broke above $1.38 and just barely missed out on setting a new two-year high versus the dollar, all while data are showing persistent improvement in the U.S. economy and stagnation in the euro zone’s. Like a tired, broken record, the euro exchange rate again highlights the impotence of a monetary structure that saddles the euro zone with short-sighted deflationary policies when central banks everywhere else have been pulling out all stops to reflate their economies.

Ukip [UK Independence Party] won the argument on Europe and in Europe
Ambrose Evans-Pritchard (The Telegraph) | Dec 12
Spiralling debt trajectories across southern Europe – and the unbelievable incompetence of the EU authorities in adding deflation to an already dangerous mix – ensures a chronic crisis that will drag on and on, sapping political consent.
The risk for Europe is not that monetary union blows up, but rather that they manage to keep it going for a long time yet on unworkable foundations, doing ever greater damage. As François Heisbourg argues in his book La Fin du Rêve Européen, the euro itself is a cancer slowly killing the European project. The currency must therefore be “cut out” before the decay spreads further. There is nothing to be gained from delay at this stage. The EMU enterprise is fundamentally hopeless.

European deflation denial
Desmond Lachman (American Enterprise Institute) | Dec 2
One has to wonder what Olli Rehn, the European Union’s Commissioner for economic and monetary policy affairs, is looking at when he boldly asserts that deflation is not a risk for Euro member countries. For not only does he seem to be glossing over the record gaps in Europe’s labor and product markets or over the pronounced European disinflation that has already occurred over the past year. He also seems to be turning a blind eye to the marked deceleration in Europe’s credit and money supply aggregates.