On Monday, I wrote that a no-speed Europe was one significant drag on the oil price. Today, the Eurozone has reported -0.2% inflation rate, prompting @DuncanWeldon to tweet:
If you really want a current 1930s economic analogy the Eurozone is the place to look.
— Duncan Weldon (@DuncanWeldon) January 7, 2015
Deflation in the Eurozone is simply a signal that, across Europe, demand has stalled.
And while the oil price drop will have contributed to the fall, remember that it’s Europe’s weakness that has, in part, contributed to falling oil prices in the first place.
This confirms that the general outlook for Europe has changed since the sovereign-debt crisis that hit Greece, Italy, Spain and others a few years back.
Then, growth in northern Europe was seen as a counter (and an example of the benefits of prudent economic policy) to southern weakness. The ECB committing to do whatever necessary to safeguard the Euro took pressure off the yields of Greece and others, giving them time to make the internal reforms imposed on them.
A two-speed Europe was seen as the new normal.
Now, growth has faltered in northern Europe as well, as France, Germany and others teeter on the verge of recession.
This no-speed Europe will put pressure on the Eurozone to find some sort of economic stimulus to support their collective economies.
The two obvious sources are a demand side boost from more spending (ie from the German consumer or from export markets like China) but that isn’t likely to happen anytime soon.
The other is Quantitative Easing (the type of money printing/buying of bonds that the Bank of England and the Federal Reserve had been doing), but which Germany’s hyper cautious central bankers have typically been against.
Something has to give, otherwise Europe will continue to weigh down the global prospects, and start eating in to the UK’s recovery.