Inflationary Issues for Euro Zone

Market Trends - 30/09/2015

Speaking to the difficulty of quantitative easing has in spurring inflation, and also to the general unwillingness of Central Banks to admit this, the latest figures from the Euro Area illustrate that the economy is suffering from setbacks similar to Japan. Preliminary reports on European CPI show a number sliding -0.10% annually, even amid a truly pessimistic expectation of 0.00%. This comes in spite of the asset purchase program lauded by ECB President Mario Draghi as the solution to economic problems in the area. Huge sums of money have been both spent, and printed in order to seek an end to the poor inflation picture, but the tactic of lowering borrowing costs in order to spur inflation has failed. Beyond the troubling horizon for inflation, what’s more difficult to comprehend is that the ultra-aggressive program has largely fizzled. If historical examples are anything to go by, the sheer amount of force and cash thrown at the problem should have had large effects, but that is not the case.

The revelation of the latest CPI numbers is a point to the team that seeks proof of monetary policy’s inability to stoke meaningful change in fundamentals like inflation. Not all blame is placed on monetary policy however, as fiscal policy implemented on the part of governments is also critical. The present competing interests in the Euro Zone remains a problem for long term goal seekers. On one hand, the EU demands caps on borrowing and strictly controls budget deficits, and on the other, measures to stimulate the aggregate economy are not centralized. A shallow look taken at the situation might see the weakening of the Euro as a proper bandage, but this solution may dissolve soon. True devaluation may remain the only way for Europe to remain structurally sound; as it is doubtful they will be able to export themselves into financial health. Accordingly, this notion is what policymakers are focusing on, as near-term fiscal reform does not appear likely.


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