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The articles from The Wall Street Journal and The Economist show the trend in the EuroZone of decreased inflation steering the economy towards deflation. There are proactive steps the European Central Bank can take to steer the economy towards the ideal 2% inflation rate, however identifying and agreeing upon which steps to take is the central issue. If the European Central Bank doesnt become proactive in their approach they would go into deflation affecting not only Europe but also the world economy.
The EuroZone is the term applied to the countries agreeing to use the Euro as their currency in exchange of meeting certain budget requirements. Instead of each country being able to control their own monetary policy, the countries within the EuroZone rely on the European Central Bank to control interest rates. The EuroZone has resulted in ease of trade between cooperating countries, and results in a more efficient economy making it easy to determine which country has the best price for goods and services.
In October the annual inflation rate fell from 1.1% to 0.7%, which is the lowest level in four years. The European Central Banks goal was set just under 2% inflation rate (FIGURE 1). Combining the low inflation with the credit crunch has created an environment where European Banks arent lending as much as hoped. With the high unemployment and low interest rates theres not much else the European Central Bank can do without taking a more hands on approach. The northern countries such as Germany, Austria, and the Netherlands have inflation rates above 1% and are performing better than their southern allies. Germany is completely against currency devaluations, and holds a lot of weight in the decision making of the EuroZone. This results in Southern Europe having to slash wages and price to compete with Germany and the others.
Although Fed officials believe consumer prices should start to increase, the rate of the increase is not nearly what was projected. US Inflation was projected to raise 2% compared to last year (FIGURE 2), however inflation only reached 1.2%.
To fight the slow interest rate growth the Fed is purchasing bonds from the banks resulting in the banks having more cash to loan. The banks havent been as liberal with issuing loans as the Fed would like, causing the interest rates to stay relatively low.
The US is caught in a balancing act trying to time when to slow down the printing of US Currency. Ideally whats needed and beneficial to both parties is an appropriate decrease in the Fed printing additional money and an appropriate increase in bank loans. Although deflation is a threat, the US has taken a more proactive approach allowing more options to steer away from deflation. Those in the EuroZone now have to hope lowering the interest rates to 0.25% would result in increased inflation and economic growth.
Central Banks have a large role in fighting