By James Saft
(Reuters) – Here is some unwelcome news for the likes of Greece, Ireland and Cyprus: Apparently it isn’t really deflation if you deserve it.
That’s the takeaway from remarks by ECB chief Mario Draghi, who despite persistently falling prices in some euro zone peripheral economies, was at pains on Thursday to define the problem away.
“We define deflation as a broad-based self-fulfilling, self-feeding fall in prices.” he told a press conference after the ECB left rates on hold. “We don’t see that in the euro area. We may see negative inflation rates in one or two countries, but we should also ask the question of ‘How much is due to the necessary rebalancing of an economy which lost competitiveness and had gone into financial and budgetary crisis and how much is due to actual true deflation?’”
This strikes me as being an unnecessarily narrow definition, though useful for a man in Mr. Draghi’s predicament. Not only is euro zone-wide inflation, at just 0.7 percent, well below the ECB’s target of just under 2.0 percent, but both Spain and Portugal are teetering on the edge of deflation, with yearly inflation increases of, well, nothing.
While it is true that the self-perpetuating effect of deflation – the tendency to put off to tomorrow what may well be cheaper – is particularly pernicious, the fact remains that prices are falling in significant areas of the euro zone due to a huge slump in demand and, as Draghi implies, as countries attempt to make themselves competitive without being able to sink their currencies.