Prices Plunged in Europe for the First Time in History

Prices slipped in the 16-nation economy to 0.1% in the year ending in June, as the CPI showed; it plunged for the first time since compiling data in 1996. Despite the rise in food and energy prices during the second quarter, prices actually declined after the rally, which ended last July. Price levels in Spain slid, while in Germany it remained steady, and in France and Italy the inflation rate declined markedly.

The decline in the general price level is not enough to claim that the economy is going into deflation; since the slowdown was due to the declining commodity prices, at the same time there are no clues whether producers were waiting for better prices. However, the decelerating price levels, if continued, may have a destructive impact on the European economy that is already witnessing a deep recession. The decline in prices along with the diminishing purchasing power for individuals is due to the high unemployment rates, which are making the economy very weak.

The jobless rate rose to the highest since 2007, where 3.5 million lost their jobs; unemployment in Germany reached 8.3%, as a result of the decline in global demand on goods and services domestically and worldwide. The German economy may contract 6.1%, this year as a consequence of the slump in the economic performance of exporting sector companies and domestic consumption sector.

It is evident that cash inflows retreated, as cleared by the M3 money supply indicator, which is one of the indicators used by the ECB to forecast inflation; the reading edged down to 3.7%, during the 3 months ending May 31. This insures that the low interest rates, in addition to opening the ceiling level for liquidity from the central bank to banks, was not enough to support the money circulation. Thus, the inflation level may remain stable at its current low level, as mentioned previously by Trichet, when he announced that prices will plunge temporarily, putting the economy in a status of disinflation but yet not deflation.

The indicators released; shows that the ECB must embark upon unorthodox measures to pull the economy out of the downturn. Trichet and his economic team, announced a 60 billion euros plan to be purchased, on buying bonds starting from next Thursday. Some analysts are claiming that 60 billion euros are not enough to give the economy a boost, especially if compared with the 125 billion pounds package unveiled by the BoE. However, others argue that the improvement in the data released recently, encouraged the ECB to start with 60 billion euros only waiting for market reaction.

All in all, the major challenge for the euro zone remains the combination of the low price levels and high unemployment rates that might cripple any efforts done by the ECB or national governments. The jobless rate resulted in a contraction once again in the United States in the Eighties last century and also led to a continuation in the decline of prices in Japan.

Ecpulse

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