July 24, 2014 11:44 AM by Lord Abbett Editorial Staff
In the Eurozone, as elsewhere, heavily indebted countries will be hurt most.
Economic growth in the eurozone continues to be weak, and inflation has been declining as well. Like most central banks, the European Central Bank is concerned about the possibility of deflation and is implementing policies to combat it. But is deflation really a problem?
Financial journalist James Grant and others have argued that deflation is not the problem it’s made out to be. In fact, it is the natural result of improvements in efficiency that have resulted from computer technology and the Internet. If business costs have been reduced dramatically, it only makes sense that consumer prices would also come down. This kind of deflation is also known as a higher standard of living, says Grant.
So why do central banks consider deflation the enemy?
After years of lagging the global economic recovery, Europe is showing signs that it can stave off deflation and rekindle meaningful growth.
While other major economies have recovered at varying rates from the global financial crisis, the eurozone has been the clear laggard. For Europe, stimulus came late, was very hard to coordinate in a timely way, and was diluted over time. The upshot is that Europe, if policymakers can agree, has more room to accommodate further measures, such as central bank support, fiscal reforms, and structural economic reforms. If so, there may be more reaction still ahead in Europe that can support the capital markets, and perhaps this warrants more investor attention for that reason alone.