Ambrose Evans-Pritchard is one of those guys who seem to feel the zeitgeist in Europe. He captures the issues of the day as well as sanyone. This weekend he writes about (gasp) deflation in Europe, as the ECB has fallen behind its fellow major central banks on the competitive devaluation front. As longtime readers know, I think the one thing central banks fear most is deflation. And inflation is once again at cycle lows.
“… the 'Japanisation effect' in Europe is having perverse effects. The fall in inflation is automatically raising real interest rates, tightening the vice further in a vicious circle. 'Deflation accidents usually happen when things seem cosy for while and central banks do nothing. Europe is now in a deflationary equilibrium but this could turn bad if there is any outside shock. We think this could come from Asia, probably a credit squeeze by China’s central bank,' he said.
“ 'Japan was able to cope with deflation in the 1990s because it had a positive global income flows of 3pc of GDP. Europe does not have that advantage. The flows are negative,' he said.
"Morgan Stanley said the ECB must take immediate and pre-emptive action to head off the risk of full-blown deflation by next year. Japan’s travails over the past 20 years show that is very hard to shake off the virus once it becomes lodged in the system."