The spectre haunting Europe

With inflation dipping significantly below 1% in the euro zone, we have now entered dangerous territory, and it is far from obvious how to get out. The basics first: an average inflation rate of 0.7-0.8% is far below the already tight target that the ECB has set itself of ‘below but close to 2%’ (in the medium run). The economies in the euro zone that are doing well, such as Germany and most of its neighbours, are, by any measure, not experiencing particularly high inflation: most estimates are around 1.5-2% for those. Because of the low inflation in the core, a large number of EMU member states are now experiencing deflation or something very close to that. The inflation rate in the single currency bloc is the GDP-weighted average of all, and that means that the low inflation in the core is mirrored in even lower inflation c.q. deflation in the periphery.