EU's Ability to Combat Deflation Is Overstated

Here is my nomination for misleading headline of the year-so far:

Fed, ECB prepare to tackle deflation head-on

That’s from Reuters Sunday evening. It’s part of an article in which Janet Yellen is quoted extensively about the Fed’s intention to not let deflation get the better of the country. Lucas Papademos, vice president of the ECB, is also quoted as saying that the ECB is prepared to continue to lower rates to keep the deflation wolf at bay. Unfortunately, this is the only bullet they have to fire.

Don’t get me wrong. I’m a fan of the European Union and their system. I think that after all of this gets sorted out we should seriously look at fixing exchange rates among currencies as a prelude to a worldwide currency. The problem is that right now all they can do is manipulate interest rates. The fiscal stimulus has to come from the individual member countries, and the scope and size of that stimulus is a subject of much discussion and disagreement.

It remains to be seen if that flaw can be overcome or if it might be fatal.

Comments

[Vienna:]

I am from Austria, and even though we are members of the European union, we do not always agree with everything their try to lay on us.

We are strictly against intervention regarding the EU in Brussels telling us what to do regarding our economy. Even though EU is made up of many countries, the individuality of each is a very important thing, and believe me, will surely never disappear.

In Austria we also have a very strong system where money is being pumped into the system. Investing into infrastructure will not be that necessary since it has been done continually.

So why should we do what someone else is telling us.

Jan 05 10:37 AM

[Adam O.:]

It's not necessarily about domestic infrastructure specifically. I think the idea is, more generally, that EU stimulus needs to come from the bottom up. Member states need to stimulate their own local economies organically.

No one is saying that Austria should do something because someone else says so. The point is that ECB rate cuts alone won't be enough to combat the 9% rise in Austria's unemployment in December. Austria will need to provide the domestic stimulus to complement the central bank action.

Rate cuts alone can't save the EU.


On Jan 05 10:37 AM Vienna wrote:

> I am from Austria, and even though we are members of the European
> union, we do not always agree with everything their try to lay on
> us.
>
> We are strictly against intervention regarding the EU in Brussels
> telling us what to do regarding our economy. Even though EU is made
> up of many countries, the individuality of each is a very important
> thing, and believe me, will surely never disappear.
>
> In Austria we also have a very strong system where money is being
> pumped into the system. Investing into infrastructure will not be
> that necessary since it has been done continually.
>
> So why should we do what someone else is telling us.

Jan 05 03:30 PM