We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]


It is becoming increasingly clear that Europe’s economic problems are a year or so away from becoming nightmarish.  The international economic establishment is getting worried, G7 finance ministers, the OECD and the IMF are making increasingly gloomy noises.  Deflation approaches like a glacier, slowly but almost impossible to stop without radical measures.  The ECB’s constitution is inadequate to deal with the problem. It is charged with holding down inflation and maintaining price stability, not with encouraging economic growth.

Inflation is not a threat, deflation is a real threat.  Japan has had 41 consecutive months with no inflation, Germany is going the same way pulling Europe with it. The US has abandoned the strong dollar policy in order to reflate, devalue its debt and cheapen exports. Consequently the Euro has now strengthed over 40% from its lows, adding to the woes of exporters.  Germany is mired in high taxes, social costs and rigid structural problems – Eurozone unemployment rates are nearly double that of the Anglosphere countries. Real interest rates (base rate – inflation) in the Eurozone are punishing compared to the US. Don’t even think about the unfunded pension problems.

So what does the ECB do? Nothing. Last year many people laughed when 90 year-old Milton Friedman joked that he would outlive the Euro. If the ECB does not re-invent itself as a growth orientated central bank, Milton may yet have the last laugh.

Paul Staines

20 comments to €uro-deflation

  • S. Weasel

    It all comes down to timing…will the euro collapse before Britain gets sucked into it?

  • Patrick W

    The humiliating, ignominious death of EU economic policy and the Euro? Now that would be shame wouldn’t it?

  • Clio

    What I find grimly ironic is that during the run-up to the Iraq War so many voices on the side of the doves argued (bizarrely, to my mind) that it was all about OIL and maintaining the global hegemony of the DOLLAR. Turns out we could not wait to hoist the burden off our shoulders! Am I the only one who noticed this?

    Secondarily, with regards to German woes, let me relate my sister’s sad story of getting too close to the global meltdown in progress. She is a sales rep for a small German shoe company. Their product is well made but already cost roughly $200/pair, no one has ever heard of them because they cannot afford to advertise, and retailers find them extremely hard to deal with because they cannot quickly respond to new trends, sudden sellouts, or sluggish sales. German industry strikes me as a lot like this company–old-fashioned and flat-footed compared to the competition, which is eating it for breakfast.

  • What’s amusing to note is how Europeans, with their fixation on ‘exchange-rate stability’, have actually given their economic bloc less, not more, exchange-rate stability.

    They’ve got stability in their real economy of course. The kind of stability known as stagnation.

  • Byron

    Am I the only one who noticed this?

    I noticed it too, although I think it’s too early to pass judgement on that matter. The US may temporarily abandon the strong dollar to boost the economy via exports and consumer spending, especially with the 2004 Presidential election just around the corner. But I believe that once the economy picks up the pace again, the strong dollar policy will come back. Further, the US is already flooding Iraq with Dollars, and without the UN involved in the reconstruction, oil sales will most likely resume under dollar denomination.

    Of course, that theory was never the prime motivator for the war on Iraq. At best it was a fringe benefit. The prime motivation was to reinforce the waning non-proliferation policy that Clinton essentially abandonned during his term.

  • Della

    So long as the deflation rate is not to high I really don’t see deflation as being that big of a problem.

    I have been to Japan which has been undergoing deflation for a few years now and things were apparently going OK there, maybe not as well as before, but OK. Fast food and electronic gadgets are very cheap compared to here. Thier unemployment rate has risen to 5.4%, but I think that problem is not caused by deflation, but by the huge movement of jobs to China, and the somewhat incompetent moves they have taken to combat deflation.

    Perhaps the deflation rate is getting a little high at 3.4% annually now, but with China right next door I can’t see any sensible policy that can get rid of deflation (I can think of a number of foolish ones).

    On the plus side this is apparently causing the Japanese goverment to implement many free market policies to try to reduce the costs of services to the population, when I was there they were just about to privitise all the motorways, and they were doing a bunch of other stuff.

    I think the main danger of deflation is that politicians will perform some very stupid actions to avoid deflation which will do a lot more damage than deflation ever would.

  • Andy Duncan

    Assuming we Brits come out the other side, from the €uro and its Constitutional nightmare, what’s hilarious about all this is Blair’s current huge effort to extract a referendum on the dead-duck currency out of Gordon Brown, the Über Witch-Monkey of the UK Treasury.

    Just which planet, exactly, is the Blair idiot on? Does he think there’s even a nano-snowdrop’s hope in hell that we’re actually going to vote for the chance to ruin our economy and work till we drop to pay off the bankrupt state pensions of EuroSov?

    Gordon Brown may make Jabba the Hut look like a friendly pizza guy, but at least he’s not so stupid to think this referendum can be won, short of a nuclear holocaust. One begins to suspect Mr Blair may have surrounded himself in the bunker with just a few too many Peter Hains, and their ilk, who tell him everything he says, thinks and does is wonderful.

    He’s going to get a horrible “Bay of Pigs” surprise, when it all blows up in his face, should he actually get his precious referendum, which will only be won, if the two options are these:

    1: I want the €uro.

    2: I do not want the Pound.

    Though, I suppose, this is Blair? He might try just that! 🙂

    But, given the current mess he’s in on all policy areas, I reckon the end of Blair is imminent. Oh happy day.

  • Ghaleon

    It seem it makes you all very happy to know Europe is going down…

  • Jacob

    It makes us happy to know Socialism is going down in Europe. Maybe a libertarian-capitalist reform will follow, and Europe will prosper again. One can dream, can’t one ?

    And, Paul, you seem to imply that the problem can be fixed somehow by having the ECB adopt a stimulant policy. So it isn’t socialism who is to blame, just the incompetent ECB ???. Not true, of course.

  • Johnathan Pearce

    Ghaleon, I am not in the least pleased to see the EU economies implode, least of all Germany. Of course, it does crush the chances of us joining the euro (hoohray!) but a decrepid Continental European economy benefits no-one, least of all us.

    It is tempting to gloat at the fate of “old Europe”, as Rummy calls it, but in the long-run, I’d prefer a prosperous Continent to the current mess any day.

    I don’t really see how the ECB can make a lot of difference. The core of the problem is taxes and regulations. Until the current bone-head political classes in “old Europe” make way for saner, more liberal types, nothing is going to improve.

    A depressing thought.

  • No, I agree with Ghaleon it is very unhealthy to rejoice in the misfortunes of others, but when those others [the EU centralising consensus] have been imposing their misfortunes and their ignorance on Britain for decades [both once inside, and before, when we were outside the EEC, through import tariffs], and take every opportunity to rejoice in our misfortunes….

    …. then the sin can be forgiven. Especially if it means freedom might be returning.

  • Ghaleon: The ability of the €uro-spin doctors to disguise the magnitude of the Europe’s economic problem is starting to decay and that is indeed a thing of some joy to me. I wish the European political class nothing but grief, disappointment, confusion and failure… but I take no joy in what Europe’s statist nightmares are doing to the millions of people who labour under the delusion that their vote somehow empowers them. Most people just want to live their private lives but are faced with ever more aggressive moves by the states of Europe to politicize civil society out of existence, reducing liberty and prosperity that only liberty can bring in the process… which is precisely why I so hate the statist political class in all their left and right forms.

  • I don’t rejoice in the economic woes of others. (Thats not to say I don’t try and profit from them, hey, a speculator has got to eat.)

    In an ideal world there’d be no ECB, in the real world there is one, if we must have central bankers, make ’em nimble a ‘la Greenspan. I want prosperity for everyone – even the French – therefore I want the ECB to be pro-active and reduce interest rates before Germany A.G. goes tits up.

    I think 80s era monetarism was the right policy for the time, today high rates are superfluous – INFLATION IS DEAD.

    The problem for the ECB is inherent in its constitution, just as was predicted by anti-Euro campaigners, the rate won’t fit all the Eurozone states. But lower rates and pro-growth economic reforms make sense to me.

  • Jacob

    “pro-growth economic reforms make sense to me”
    Pro growth reforms mean: leberalizing, deregulating, de-unionizing the labour market, lower taxes, welfare and pension reform etc., etc. Exactly the contrary of the current trends.
    ECB’s interest rates are’nt so important a factor.

  • The biggest problem with the euro is the largeness of the euro zone. The other problems are superficial.

    The US is prosperous despite having a large currency zone. Crucial for American success is the cultural willingness of Americans to move in search of new work. Three times as many Americans move home each year inside the US as French people move within France (so it’s not a language issue).

    Ordinary Europeans’ idea of the EU and the euro is that they see it as a system ensuring they don’t have to move in search of work like Americans. Pro-EU Europeans expect government to bring work to their town, rather than the other way round.

    But the move to a larger currency zone, not quite in step with German needs, French needs, Italian needs is a move exactly in the opposite direction. A big euro-zone doesn’t fluctuate in line with what one region needs. The north of England, the north of Japan, and the south of Italy are stubborn cases of long-term backward regions in rich countries where the existing currency zone is already too large.

    The euro will destroy the EU because it enforces the opposite of what pro-EU Europeans want. That’s why they’re starting to vote fascist in reaction.

  • Sandy P.

    Oh, goody, both the dollar and the euro in the crapper in the not-so-far future.

    So, what does this mean? Who’s cuisine reigns supreme? Will Japan finally get its act together a decade+ late and help?

    Do we need to stop getting so old?

    Please don’t tell me China or India.

  • A,

    1. Inflation IS dead. That commodity prices have rallied in past few years like there’s no tomorrow and inflation has flat-lined confirms it. There is no pricing traction and no immediate prospect of any.

    2. “Current Fed policy to increase credit into system awash with cheap funding is suicidal at best.” If inflation was a problem it would be dangerous, inflation is not a problem – deflation is the danger.

    3. “Where does this leave Euro? Deflation in eurozone? Maybe for the time being, but we are nowhere near the Japanese case which has it’s roots in banking crises (as Japanese banks are basically bankrupt). Europe’s economic woes are rooted in the rigid labour laws and government interference.”

    Commerzbank teetering on the edge of bankruptcy, HVB a basket case, Dresdner dreadful and Deutsche threatening to headquarter in London. Looks like a banking crisis in Frankfurt to me!

    “In my view, ECB’s “lack” of action regarding interest rate policy is actually positive for the free market de-regulation. This forces Eurozone government eventually face the facts : reform or perish.”

    Progress through Sado-Monetarism? Maybe. I get the idea. But maybe the politicians will change ECB rather than the ECB reform the politicians.

  • Oh almost forgot – that non-existent German banking crisis – they have asked the German government to bail them out by taking loans off their books – Japan style.


  • A

    Paul… maybe this will help :

    “Even Pat Jackman, economist at the Bureau of Labor Statistics, which calculates the official inflation rate, says the widely reported numbers understate the rising cost of life from one year to the next. The fact is, he says, “more money is coming out of your pocket.”
    The discrepancy comes from the way the government calculates inflation. In compiling its consumer-price index, the BLS relies on roughly 80,000 price quotes that flow into its offices every month. The bureau smoothes and adjust those numbers in varying ways to account for improvements in quality, among other things.
    For example, the bureau looks at the price of a car today and the price of a similar version of that car in the past. If the car now costs more but comes with a lot of extra features, the bureau may consider that just a minor price increase or even a price reduction. That’s because the consumer got a higher-quality product for roughly the same cost. But the reality, of course, is that you’re still paying more money for a car than you used to.
    “You had to pay more because you can’t buy exactly what you did last time,” says Mr. Jackman. “It’s forced substitution.”

    There’s lies, damn lies and statistics.

    Reason for big ticket durable good price declines in past few years can be traced back to globalisation … especially cheaper Chinese imports. However there is limit to savings in unit labour costs – and we’re close for it. Also Chinese Yuan is pegged to USD and as dollar gets hammered in the markets this will lead into increased raw material costs.

  • Jacob

    I can say from personal, anecdotal experience that prices go up more than the consumer price index states. I have allways misstrusted government statistics, especially in cases like this where they have a definite interest in cheating (establishing a low CPI).
    Flooding the market with cheap dollars MUST cause inflation. Inflation will follow in due course. The low exchange rate of the dollar shows that this is also what the market thinks. Maybe the ECB’s idea of stability is better. Governments need to implement some real reforms, and not manipulate the currency, seeking miracle cures through inflation.