The attached article essentially describes the economic issues surrounding the euro zone. Although the original economic crisis in Greece seemed to have been avoided, recent events threaten to throw the euro zone back into turmoil. Deflation has set in in some of the countries that originally struggled, and this deflation combined with the large amount of debt some of these countries took on to get out of the crisis could spell bad news for the entire continent.
This combination is what some economists call the debt-deflation spiral, and a famous example in history of a time that it occurred was in the United States from 1929 to 1933, AKA the beginning of the Great Depression. This is what so many economists are afraid of. While there is still time to avoid such a dramatic outcome, should the deflation spread to the rest of the continent the ramifications would be horrendous.
As we have discussed in class, deflation/inflation can have big effects on trade. If one country’s currency becomes more valuable (deflation), then the cost of the goods that it produces will also go up. This means that the number of exports for that country would decrease. The same is true for an entity such as the euro zone. Large amounts of deflation will decrease the amount that it will be able to export, and therefore reduce the income of the euro zone. But this is not just bad news for the Europeans.
The other side of the coin of deflation is usually an increase in the imports of the country which experiences the deflation. Because that country’s currency is more valuable it can afford to import more goods. This in turn raises the income of its trading partners. Unfortunately, in the case of the euro zone there is so much debt built up that the increase in imports will be minimal, or at least not make up for the decrease in exports, and spending throughout the whole world will go down. This in turn will hurt the world economy as a whole.
I think one of the biggest factors pertaining to the health of the EuroZone is the lack of quantitative easing that the EU is accomplishing. If you remember, the U.S. Federal Reserve was buying back over $80 billion of mortgage backed securities per month at the peak of its QE and still today (even though while tapering) is buying back around $50 billion. This QE is in part why the U.S. economy has recovered to date. However, in contrast the EU is buying back a small fraction of what the Federal Reserve did during its QE and as a result can risk stalling the European recovery and spawning more deflationary pressures.
ReplyDeleteWhat this article discussed have brought me to go through what happened in Euro zone currently is reminding me of what happened in China after the worldwide financial crisis when the Chinese government had an economic stimulus in Chinese Market, which led to a periodic inflation to China. The higher inflation resulted in that people endured higher prices in consumer goods but with constant wage, and also brought about a rising housing price, which made people in middle-class in China more hard to possess their own apartment. However, we were not in an advantageous situation in the economy which driven by the export sector, due to the pressure of appreciation of the RMB.
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