Eurozone’s Sticky Recovery

New York Times Article

The inflation rate came in at 0.7 percent in January, Eurostat said in its initial estimate, significantly lower than economists had expected and slowing from 0.8 percent in December.

Some economists have argued that falling inflation in the euro zone, coming after five years of recession or very slow growth, means that the currency bloc faces an acute risk of deflation — a sustained and broad fall in prices that can destroy the profits of companies and the jobs they provide.

[Carsten Brzeski, an economist at ING Group]: “We need at least 1 percent to 2 percent annualized growth to create jobs,” he said, “and we just haven’t been getting it.”

My opinion: If I were writing about the recovery post Great Recession in a textbook, I would call it the Sticky Recovery. The vast amount of credit that central banks around the world are pumping into the system, for some reason, is not causing the economic wheels to turn. It is safe to say that something is missing in the current transmission channels of monetary policy, particularly for the ECB.

The unconventional policy techniques taken by the Federal Reserve seem to have worked relatively well for the US. By expanding the Fed’s balance sheet, they have been able to keep demand for credit market instruments high enough so the usual channels of credit for individuals and businesses didn’t dry up in the wake of the crisis. Apparently, the Eurozone has not had similar success with their monetary policy; and, if deflation creeps up on them… (see Japan’s history with deflation).

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s