An electronics store in Athens. Deflation can cause consumers to delay purchases, as they await prices to fall further.Alkis Konstantinidis/Reuters
PARIS — Europe’s economy has reached a psychological inflection point.
On Wednesday, an official report showed that consumer prices in the eurozone fell 0.2 percent in December from a year earlier, the first time they have turned negative since the dark days of the global financial crisis in 2009.
It is an outcome that economists have been predicting for more than a year and a trend that has long been complicating Europe’s recovery.
Now, the latest data is adding concerns that Europe is headed for a new financial and economic crisis. Unemployment remains persistently high. The euro has been particularly weak. And the political upheaval in Greece is prompting talk about the stability of the 19-country euro currency union.
With the outlook deteriorating, pressure is mounting for the European Central Bank take more aggressive action to avoid a downward price spiral that could undermine the economy for years to come. Top officials have already been signaling that they could announce a major bond-buying program later this month.
Falling Prices
The eurozone inflation rate fell below zero in December for the first time in more than five years.
Eurozone inflation rate
Change from year earlier
+ 4
%
+ 3
+ 2
+ 1
0
DEC.:
–0.2%
– 1
’04
’06
’08
’10
’12
’14
But the question raised by many economists is whether the European Central Bank has waited too long to act, and whether its arsenal is powerful enough to address the eurozone’s fundamental problem — a dearth of demand from businesses and consumers for goods and services. Even the bank’s president, Mario Draghi, has said that it alone cannot shoulder the burden of restarting growth.
“The eurozone is suffering from a profound malaise,” said Simon Tilford, deputy director of the Center for European Reform, a think tank in London. “It’s already in a deflationary trap of the kind we saw in Japan in the 1990s, but it’s less well equipped than the Japanese to deal with it,” he added, citing the institutional challenges of managing a currency bloc of 19 nations.
The situation in Europe does not appear to meet the classical definition of deflation, a widespread, protracted and self-sustaining decline in prices. And the continued global collapse of crude oil prices contributed significantly to the decline, blurring somewhat the implications of the inflation report for the 19-country euro currency union.
But the trend is dangerous. The low inflation environment was already a signal of a listless economy, with consumers spending little despite low prices and companies having scant incentive to invest in their businesses.
If prices actually fall for an extended period, consumers might delay purchase in hopes of getting a better deal later, and businesses would see little reason to make products that would be worth less with each passing month.
"We’re not yet in a self-sustaining spiral,” said Gilles Moec, chief European economist at Bank of America in London. “But we’re close.”
The labor market provides one illustration of what makes Europe’s situation particularly complicated to fix.
A separate official report on Wednesday showed that the eurozone jobless rate remained at 11.5 percent in November, around the level at which it has been for the last year. But overall numbers don’t give a complete picture of what’s happening in each country, where fortunes are diverging.
In Germany, which has the bloc’s biggest economy, unemployment fell to 6.4 percent in December from 6.5 percent in November. But in the second- and third-largest of the eurozone economies, France and Italy, the jobless rates climbed, with Italian unemployment reaching a new high of 13.4 percent.
And in Greece and Spain, about a quarter of the population remains without work, a level consistent with economic depression.
Analysts said on Wednesday that it was now a certainty that the European Central Bank would announce aggressive new measures when it meets in Frankfurt on Jan. 22. They expect the central bank to say it is ready to begin effectively printing money that it would use to buy eurozone government bonds, even if it does not put the measures into practice for several months.
In doing so, the bank would follow an unconventional policy similar to thequantitative easing used by the Federal Reserve to stimulate the American economy.
But quantitative easing is a divisive issue in Europe because of questions about how to allocate the bond buying among eurozone countries, and who would pay if a government defaulted on bonds held by the central bank. That uncertainty is a main reason that Germany does not want to put its taxpayers at risk of having to bail out the bloc’s weaker neighbors.
The central bank has an official goal of trying to keep inflation at just below 2 percent, which it considers an optimal level for a healthy economy. But the bank has not met that target in two years.
Japan’s experience in the 1990s showed that traditional monetary policy instruments are largely ineffective with nominal interest rates at zero, as they essentially are now in the eurozone.
Another way to address the problem might be for eurozone countries to drop their insistence on balancing budgets and to instead use tax cuts and public spending to create demand.
So far, though, European officials appear to be holding their course.
“Yes, the eurozone is going through a period of low inflation,” Jeroen Dijsselbloem, the Dutch finance minister and president of the Eurogroup of eurozone finance officials, said in a statement in response to a New York Times query. “But one of the most important reasons for the current low inflation rate is the falling oil price. Core inflation — excluding oil prices — has recently slightly increased.”
The core inflation rate, which excludes energy and food prices, ticked up to 0.8 percent in December from 0.7 percent the month before, according to Wednesday’s data.
The German government of Chancellor Angela Merkel, which has taken a tough line against coordinated economic stimulus, indicated that the latest data had not altered its thinking. A spokesman for the Finance Ministry said in Berlin on Wednesday that Germany would not revise its analysis that there was no risk of deflation in the country. That statement came despite a report on Monday showing that German consumer prices rose 0.1 percent last month.
Jörg Krämer, chief economist at Commerzbank in Frankfurt, on Wednesday defended the German view, saying that the danger was being overstated in light of the debt overload that was behind the global and European financial crisis that developed in 2008.
“It’s inevitable after the bursting of a debt bubble that inflation is low, as consumers and business repay their debts and spend only hesitantly,” he said.
Some of the weakness in prices reflects lower labor costs in the weaker “peripheral” eurozone members, he said, something that can make their economies more competitive. “We do not have harmful deflation,” he said.
There is no question, though, that the eurozone is ailing. The bloc’s economy expanded 0.6 percent in the third quarter of 2014 on an annualized basis. That is far short of the United States economy’s 5.0 percent growth, and recent data suggest that the eurozone pace has been slowing.
That stark difference is one reason the value of the euro currency has been plunging compared to the dollar in recent weeks. It fell again on Wednesday after the inflation report, declining more than 0.5 percent to $1.1816 — its lowest level in nine years. As was the case the last time the euro was this low, fund managers are moving investments to the United States in expectations of a better return on their money.
Consumer prices in the eurozone had not contracted on an annual basis since October 2009, when the slack global economy made the bottom fall out of the market for oil and other commodities. December’s negative rate was down from the 0.3 percent increase in November.
Well before eurozone consumer prices tipped below zero, the region’s low inflation rate had been raising alarms.
Economists with the International Monetary Fund warned early last year that the difference between ultralow inflation, which they called lowflation, and outright deflation was mainly a matter of degrees, as the weak price pressures could “scupper the nascent recovery and pressure the most fragile countries.”
Mr. Draghi, the central bank president, said last week in an interview with the German newspaper Handelsblatt that the risk of deflation “cannot be ruled out completely, but it is limited.”
“We are not there yet,” Mr. Draghi said. “But we need to tackle this risk.”
Investors have been snapping up government bonds of eurozone countries amid expectations that a European Central Bank purchasing program would make them more valuable. Yields on German, French and Belgian bonds have all hit record lows this week.
Ireland on Wednesday was able to issue seven-year bonds at a yield of 0.867 percent, an astonishingly low rate for a country that was bailed out by the I.M.F. and the European Union in 2010.
Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in a note on Wednesday that the contraction in consumer prices “is a severe blow to the credibility” of the European Central Bank.
“The E.C.B.’s hand has been forced,” he said. “Anything less than a firm pledge by its president, Mario Draghi, that sovereign quantitative easing is imminent will be taken very badly by markets."
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