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The “Enormous Cost” of the Eurozone’s Battle with Deflation

Originally published by LiveMint.com on April 10, 2017 Read the original article.

In the ongoing saga of the European Central Bank vs. deflation, chalk one up for the ECB in 2016, according to ECB President Mario Draghi.

In the ECB’s annual report, he also judges 2016 as the eurozone’s best year since the European debt crisis.

Here’s more from an April 10 livemint.com article:

“Though the year began shrouded in economic uncertainty, it ended with the economy on its firmest footing since the crisis,” President Mario Draghi wrote in a foreword.

In March last year, the ECB had responded to alarmingly low inflation by boosting its massive bond-buying scheme, lowering interest rates and extending cheap loans to banks.

The ECB’s moves were designed to pump in cash through the financial system and into the real economy, making it easier for businesses and households to borrow for spending and investment, thus powering growth and ratcheting up inflation towards the ECB’s target of just below 2%.

By December, the eurozone economy looked healthy enough for the Frankfurt institution to scale back its bond-buying from the €80 billion ($85 billion) per month set in March to its previous level of €60 billion.

“This reflected the success of our actions earlier in the year: growing confidence in the euro area economy and disappearing deflation risks,” Draghi judged.

But EWI’s April European Financial Forecast offered its own perspective:

Europe’s recovery has been lukewarm at best. After contracting at nearly 6% in early 2009, the eurozone economy is growing at just 2% today. Deflationary pressure has likewise lessened, but the Consumer Price Index has merely returned to the central bank’s 2% target. Completing the trifecta, eurozone unemployment remains at nearly 10% after peaking above 12% in 2013. “Our monetary policy has been a success,” Draghi says, but even these mildly improved statistics have come with an enormous cost: Government debt as a percentage of GDP has ballooned from less than 65% in early 2008 to more than 90% today. Meanwhile, government debt remains above 160% of GDP in crisis-stricken Greece, and it’s still north of 130% in Italy, Europe’s third-largest economy.

EWI’s analysis also shows that the eurozone’s battle with deflation is far from over.

We encourage you to read the 11-page FREE eBook, “What You Need to Know NOW About Protecting Yourself from Deflation.”

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