- Economics March 6
In 2011 and 2012, many thought the Euro might break up due to the sovereign debt crisis. Unlike countries that have their own currency, countries in the Eurozone are dependent on the monetary policy of the European Central Bank (ECB). This disconnect makes Euro countries much more vulnerable than other countries to solvency crises. Since, then, however the new chief of the ECB, Mario Draghi, has engaged in a bond-buying program of Outright Monetary Transactions (OMTs) which has helped struggling periphery countries (Spain, Greece, Portugal, Italy, etc) stay solvent.
But while this has lowered interest rates in the struggling countries — and done enough to keep the Euro together — it has not been enough to get Europe out of the woods. Unemployment still remains cataclysmically high in Greece, Spain, Portugal, Italy, and high throughout the Eurozone. And now with inflation rapidly falling, many are worried that Europe is falling into debt deflation. Of course, Europe as a whole is not in deflation yet.
But as Paul Krugman argues, the process is already under way:
I'd say that to have debt deflation — in which falling prices due to a weak economy increase the real burden of debt, which depresses the economy further, and so on — you don't need to have literal deflation. The process begins as soon as you have lower inflation than expected when interest rates were set. It's also noteworthy that inflation rates in the highly indebted countries are all well below the eurozone average, with actual deflation in Greece and near-deflation in the rest. So the debt deflation spiral is in fact well underway. [The New York Times]
Europe's approach throughout the crisis has been to do the very minimum necessary to keep the Euro system afloat. It remains to be seen if that is an approach compatible with an economic recovery anytime soon.- -
THE WEEK'S AUDIOPHILE PODCASTS: LISTEN SMARTER
- This is what happens when Republicans actually enact their radical agenda
- How I dug myself out of debt — and stayed that way
- Russia is stealthily threatening America with nuclear war
- 6 things the happiest families all have in common
- 43 TV shows to watch in 2014
- The science of sex: 4 harsh truths about dating and mating
- 13 Urban Outfitters controversies
- America is doomed! (And other thoughts on our gloomy historical moment.)
- If Scotland leaves the union, is Northern Ireland next?
- Your 2-year-old doesn't need to go to school
Subscribe to the Week