Eurozone Deflation Danger - Assignment Example

EUROZONE DEFLATION DANGER Eurozone Deflation Danger Presently, the global economy is not working as anticipated because of the various challenges it has encountered in the recent years. Although Britain and America are reflecting positive performance, the growth in China has gone down considerably compared to 2009 while Japan is struggling to catch up with the world economy growth trends. Unanticipated dangers are large to attribute to the some of these poor growth trends. For instance, the Ebola epidemic, which contributed to the death of thousands of people in West Africa, has spread its effects to diverse parts of the world, resulting in uncertainty concerning economic growth. Nonetheless, irrespective of the diverse challenges facing the global economy presently, continental Europe poses the biggest threats to the growth of the world economy (Economist, 2014). Presently Germany is witnessing a fall in terms of growth. Based on the contribution that Germany makes to the Eurozone, this means that the euro area will head towards its third recession in a period of six years. Irrespective of the efforts that the leaders of the Eurozone have made to boost the growth of the region and save the dominant currency, they have ended up wasting two years without any progress (EurActiv, 2015). Italians and the French have for instance embarked on introducing structural reforms while Germans have supposed strictness of operations, and these efforts have not been effective in boosting growth in the region. In the European region, more than eight countries are witnessing falling prices. The overall rate of inflation has gone down considerably to about 0.3 percent, and will deteriorate further in the coming years. The Eurozone comprises of about one-fifth of the global output. Thus, with the rate at which the region is witnessing deflation and stagnation, it is likely that this effect will prevail in different parts of the world, leading to global stagnation in the coming years (Los Angeles Times, 2015). Despite the effect being felt in Europe, several optimists both outside and inside Europe refer to the example of Japan. During the late 1990s, Japan witnessed a major deflation, which has unpleasant effects. This deflation did not have the major influence on the country or the world. However, based on the events taking place in the Eurozone, it is apparent that more dangers will emerge. Unlike in the case of Japan, the case of the Eurozone is not secluded. From America to China, the rate of inflation is considerably low and falling. Unlike Japan’s case, whose society is enduring and homogenous, it is not possible for the euro area to cope with this issue after witnessing years of falling prices and economic sclerosis. As burdens of debt exist from Greece to Italy, investors will panic, creating room for mainstream politicians to dominate the region. As a result, the euro will head towards failure sooner (Eichengreen, 2014). In the opinion of many Europeans, particularly the Germans, they have grown up knowing that inflation creates devastating effects to an economy. However, irrespective of this, the emerging deflation in the region may still lead to overwhelming effects. In case organizations and individuals in the region anticipate that prices will fall, the level of spending will go down while demand falls. The number of loan defaults will also rise significantly. This exact case prevailed during the Great Depression when Germany faced the most severe consequences in the 1930s (Economist, 2014). The situation here is worrying because out of the 46 nations where the central banks lay emphasis on inflation, about 30 of them have not reached their target. Additional fall in prices will emerge. The prices of oil are going down in the region, providing customers with an opportunity to boost their income levels. However, the dropping prices link with the dropping prices as well as stable wages. These have resulted in weak demand in the region while more than 45 million employees remain jobless in the affluent OECD nations (EurActiv, 2015). Investors are anticipating low inflation rates even in advanced economies such as the U.S. whose rate of growth is reasonable. This situation is worsening in most economies because rates of interest are nearing zero. This issue is creating challenges for central banks to cut interest rates to facilitate in boosting the level of spending in the economies. The major solution that they are opting for is quantitative easing as well as other means of money printing. Because of the threat posed by the low inflation in different parts of the world, it is ideal for central banks to ensure that the monetary policy they adopt is loose. During the long term also, it will also be appropriate to look for ways of revising their targets for inflation to boost them. However, the immediate problem that poses these challenges is Europe (Eichengreen, 2014). The performance of the economy in Continental Europe has various prevailing weaknesses, which make it susceptible to deteriorating growth. The labor markets are sclerotic, the demography is poor and faces huge debts, which are expensive to pay. The region has also been associated with making many mistakes when implementing its policies. Countries, such as Germany, Italy, and France refrained from adopting structural reforms that enhance growth. The euro zone will be subject to deflation particularly because Germany is mostly insisting on the implementation of major fiscal severity as well as the timidity of the European Central Bank (ECB). Even today, with the performance of major economies deteriorating, Germany still requires governments to embark on the reduction of deficits. Furthermore, Germany rejected the monetary easing process. This means that the ECB has experienced despair, leading it to do far less compared to other major central banks with regard to quantitative easing. This has added to deteriorating performance of the bank and the region considerably (Los Angeles Times, 2015). In case logic prevails for implementing this instrumentalism strategy, it is no longer applicable in the region. As budgets go down while the EBC implements efforts to convince individuals that it is capable of preventing prices from going down, it is probable that the region will descent to deflation. There are various signs of stress being witnessed in politics and markets based on the economic performance of the region. In Greece, the yields of bonds have risen considerably. Germany and France are also engaging in rhetorical blows because of the new proposals for making a budget, which are coming from Paris (EurActiv, 2015). In case Europe wants to prevent the performance of the economy from worsening, it will be required to avoid behaviors, which are leading it to destruction. The ECB also needs to begin purchasing sovereign bonds. The chancellor of Germany should also provide Italy and France with opportunities for slowing their fiscal returns. These countries also need to embark on accelerating structural reforms. Since Germany is capable of borrowing money when interest rates are negative, it should aim at spending more towards building its home infrastructure (Eichengreen, 2014). The proposed initiatives would not be sufficient in assisting the euro zone to recover fully from its situation. These appear to be the initial years of the catastrophe facing the Eurozone when half of the solutions under consideration seem to be worsening the crisis. The region needs to come up with a radical strategy. One of the major challenges that here is that European law prevents the adoption of solutions gathered from textbooks, such as the way the ECB buys government bonds, which are newly issues (EurActiv, 2015). One of the appropriate legal solutions that can address the situation in the euro zone is allowing the ECB to raise expenditure on bond-buying infrastructure. This way, it would be possible for EIB (European Infrastructure Bank) establish big investment expansions, including cross-border railway links or additional sophisticated electricity grids. It should obtain funds through bond issuing process, which the ECB can realize by purchasing in secondary markets. It would also be ideal to redefine the deficit rules governing the European Union to remove investment spending (Economist, 2014). This would create an opportunity for the government to operate larger deficits while the ECB offers the backstop. However, these initiatives will encounter challenges because Germans appear ready to take an action in case the currency appears to be in a catastrophe. People are also suffering across Europe, particularly in Spain and Italy where the rate of unemployment is more than 40 percent. These issues are creating additional challenges with regard to addressing the issue facing the euro zone (Economist, 2014). References Economist 2014, The world’s biggest economic problem, viewed 27 June 2015, . Eichengreen, B 2014, Eurozone deflation looms: quantitative easing is the answer, viewed 27 June 2015, . EurActiv 2015, Eurozone exits deflation, but dangers still loom, viewed 27 June 2015, . Los Angeles Times 2015, Eurozone faces dangers of deflation as prices fall, viewed 27 June 2015, . Read More