Deflation: The Next European Crisis?

Still trying to fill the enormous financial hole in the government, European countries now have encountered another "trouble" - lacking inflation. Other countries, including Greece, are facing very low inflation rate. Such an outcome may result in some of the weakest economies in the euro area more difficult to shake off the doldrums. The Government is facing more difficulty in fixing the budget and reducing public debt.

Analysts say that the continued decline in the price or deflation is highly possible in euro-zone countries, including Spain and Ireland. The London-based consultancy Capital Economics economist Mike Cowan (Jennifer McKeown) said that with the bursting of the bubble property market in Spain and Ireland continue to spread, the two countries will face a very long deflation, which is a very large risk.

One of the purchasing managers' survey showed that in Spain, Greece and Ireland last month, the manufacturer cut its sales prices, and thus continued the trend of the past year. In Greece, due to intense competition, manufacturer's pricing power continued to be limited. Sales price made the biggest drop in eight months. Subject to export and domestic re-purchase promotion, euro-zone manufacturing sector output in February rose to 30 months highs. At the same time, Ireland's consumer prices have started going down. Ireland's consumer prices fell last year compared with 2.6 percent, the sharpest decline in the euro zone. Ireland's recession led to the end of 2009 the country's unemployment rate rose by nearly two-thirds, to more than 13%, followed by Ireland at the decline in consumer spending. Many economists said the unemployment rate is the highest in Spain for the euro area, consumer prices were in danger of going lower.

From a business point of view, lower prices for consumer goods and services often mean less profit. From the government point of view, it means less tax revenue, for sales tax and value-added tax revenue accounted for a large part of the European countries, particularly in the case. When the price fell in-depth the in homes and businesses, because they think that the future products, services and labor costs will be lower. It will lead to deflation, causing households and businesses to postpone spending, investment and recruitment.

All the above will result in the country's economic downturn. For the euro area, this may lead to Greece, Ireland and other countries in efforts to reduce budget deficits. The fragility of the calculation itself has become more difficult to handle. The European Central Bank said it has avoided the inflation and deflation: from 16 countries comprising the euro zone's annual inflation rate of about 1%. Guiding the enterprises, labor and consumer behavior of the medium-term inflation expectations than the short-term price movements is more important.

Survey data show that professional forecasters expect the inflation rate target in the next five years to be set by the European Central Bank to be approximately about 2%. This is the case for the euro area as a whole. However, many analysts say the Portugal, Ireland, Greece and Spain, accounted for about one-fifth of the euro-zone, may face much lower inflation rate than euro-zone average and even be a price drop over the next few years.