Europe’s Deflation Problem..

Jean Pisany-Ferry of Bruegel has a nice piece in Project Syndicate on the topic.

He says like Bernanke acted on possibility of deflation in 2002, so should ECB.

“Having said that deflation in the United States is highly unlikely,” outgoing Federal Reserve Chairman Ben Bernanke famously remarked in 2002, “I would be imprudent to rule out the possibility altogether.” At that time, annual inflation in the US exceeded 2%, and the risk of it becoming negative was indeed remote; but Bernanke nonetheless felt it necessary to map out an escape route from a potentially catastrophic scenario. The response that he described was essentially a preview of the policies that the Fed implemented in the aftermath of the 2008 shock.

For the eurozone today, the threat is not remote. According to the latest inflation data, annual consumer price inflation is just 0.9% (and 1% if volatile energy and food prices are excluded). That is one percentage point below the European Central Bank’s target of “below, but close to, 2%.” With the economy clearly operating below full capacity and unemployment above 12%, the risk of a further decline cannot be excluded, especially given downward pressure from a gradually appreciating exchange rate and a global context of negative growth surprises and subdued commodity prices. So it is past time to recognize the deflation danger facing Europe and to consider what more could be done to prevent it.

He does not give his policy choices. But are we looking at QE from ECB now?

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