Jan 9 (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
“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.