Banks, Financial

Banking app targets millennials who want help budgeting

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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Banks

RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Categorized | Economy

Europe’s flirtation with deflation


Posted on October 31, 2013

The US government could not have chosen a better day to attack Germany for pushing the eurozone into deflation. Hours after the US Treasury published a report that was highly critical of Berlin’s large current account surpluses, fresh statistics showed that inflation in the eurozone fell to 0.7 per cent in October, a four-year low.

The US is clearly not in a position to lecture any country on economic policy making. For weeks, Congress has flirted with a US default, which would have been calamitous for the global financial system. This game of Russian roulette may well resume next February, when the US is expected to hit its debt ceiling again. Yet, the faults of the messenger do not invalidate what he has to say. While the blame for the eurozone’s disinflation does not rest with Berlin alone, the US Treasury’s analysis is both correct and timely.

    The eurozone’s slow march towards what some see as Japanese-style deflation began in crisis-hit countries, where companies cut prices to counter chronically feeble demand. Germany should help its weaker partners during this difficult transition, cutting taxes and letting wages rise. German workers would have more cash to spend on imports, some of which would come from countries such as Spain, Greece and Italy. Yet Berlin has repeatedly ignored this prescription. As the US Treasury notes, in 2012 Germany’s nominal current account surplus was larger than China’s.

    While fiscal expansion in Germany is desirable, it will not, on its own, rescue the rest of the eurozone from a lengthy depression. There is only so much money that Germans can spend on an extra holiday in Rhodes or a new designer bag made in Milan. Saving the eurozone from deflation requires a concerted effort among its institutions, starting with the European Central Bank.

    After buttressing the single currency with its conditional bond-buying scheme, the ECB has done little to stop inflation undershooting its target of close to (but below) 2 per cent. A rate cut in May and a promise to keep monetary policy loose until growth returns was all Frankfurt had to offer. When the ECB’s governing council meets next week, it should immediately cut its policy rate from 0.5 to 0.25 per cent. A new round of cheap loans to the banks – perhaps linked to how much they lend to companies – should also be on the cards. Germany should not oppose these moves. A stronger eurozone is in the interest of Berlin and of the rest of the world.