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The European Central Bank now finds itself in an unenviable position. For rather than converging as had been hoped for at the time of the Euro's launch in 1999, economic performance in the Eurozone's 18 member countries has diverged. And the ECB has only one policy interest rate to set for its 18 member countries, which now find themselves in very different economic circumstances from one another. Not helping matters is the fact that the Eurozone remains very far from a real fiscal and banking union that would make a single monetary policy for the Eurozone a more palatable proposition.

The Eurozone's southern member countries desperately need a very much more aggressive ECB monetary policy stance. For the most part, their economies remain weak, unemployment remains very high, and both their public and private debt to GDP ratios have reached disturbingly high levels. Making matters worse, the real threat of deflation has raised its ugly head at a time that these countries are still being required to engage in budget austerity. Greece, Cyprus and Latvia are all already experiencing outright deflation, while countries like Ireland, Portugal and Spain are all on the very cusp of deflation.

Deflation is the last thing that a highly indebted and struggling European economic periphery now needs. For deflation has the effect of increasing the real burden of those countries' private and public sector debts. This makes it all but impossible for the peripheral countries to restore private and public debt sustainability. It also creates a strong headwind for any meaningful economic recovery in those countries, which heightens the risk that those countries might succumb to a Japanese-style deflationary trap.

Complicating the ECB's task in striking the right monetary policy balance for Europe is the fact that its northern member countries, including Germany, Austria, Finland and the Netherlands, find themselves in very different economic circumstances from those in the south. For the most part, those countries' economies are showing signs of real recovery, their unemployment levels are but a fraction of those in the periphery, and their private and public debt levels are at manageable levels. At the same time, these countries' inflation rates are considerably above the Eurozone average and not far from the ECB's target of close to but below 2%.

This divergence of economic circumstances between the Eurozone's north and its south is all but certain to delay any timely response by the ECB to the real deflation threat now all too apparent in the European economic periphery. That is very much to be regretted because it increases the risk that by the time the ECB does respond it will have been too late to avert the damage that deflation will wreak on the European periphery.