Paul Krugman brings very clear light on a couple of data points that may go unnoticed to those who don't deeply follow macroeconomics.
I don't see much to add -or much to substract for that matter, which I feel compelled to do for it not to be a direct copy and paste (Mark Thoma told me in an email how difficult he sometimes found this exercise, in deference to him I will force myself to carry it too).
[...] One thing is not a risk, because it has already happened: the euro area has entered a Japan-style deflationary trap.
I don't see much to add -or much to substract for that matter, which I feel compelled to do for it not to be a direct copy and paste (Mark Thoma told me in an email how difficult he sometimes found this exercise, in deference to him I will force myself to carry it too).
[...] One thing is not a risk, because it has already happened: the euro area has entered a Japan-style deflationary trap.
No, it’s not literally
deflation at an EA-wide level, but that doesn’t matter — slightly
positive and slightly negative inflation with interest rates already at
the zero lower bound are essentially the same. Furthermore, southern
Europe still needs substantial amounts of “internal devaluation” — that
is, still needs to reduce costs and prices relative to Germany — so that
a low overall euro area inflation rate means destructive deflation in
much of the continent.
And if you look at the implied market forecast, it’s truly disastrous. Right now, German 5-year bonds
offer a yield of zero — an implicit firm forecast that Europe will be
in a liquidity trap for the foreseeable future, while 5-year index bonds
are yielding about -0.35 percent. That’s telling you two things:
investors see so little in the way of profitable investment
opportunities that they’re willing to pay the German government to
protect their wealth, and they expect something like 0.3 percent
inflation over the next five years, which is catastrophically below
target.
How is this supposed
to end? [...] It’s really hard to see how the ECB could gain enough traction
here to solve the problem even if it didn’t face internal dissent from
the hard-money types.
So don’t think of
Europe as having a tough but workable economic strategy, endangered by
Greek voters and such. Europe is at a dead end; if anything, Greece is
doing the rest of Europe a favor by sounding a wake-up call.
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