Weekend Economists Toast the Apostle of Ireland March 14-16, 2014

[Demeter]

4. EMU Periphery Watch: 'Deflation Club' Increases To Four

https://mninews.marketnews.com/content/emu-periphery-watch-deflation-club-increases-four

Signs of deflation strengthened on the Eurozone periphery Wednesday, with four countries now registering annual declines in consumer prices. Data around the edges of the single currency area showed that consumer prices fell by 0.1% in February in both Portugal and Slovakia compared with a year ago. The two countries join Greece and Cyprus, where price declines are already running at an annual pace of more than 1.0%. European Central Bank officials continued to say Wednesday that there were no signs of deflation in the Eurozone as a whole, but that the risk remained present in at least some specific areas of the economy.

"We don't see deflation in the Eurozone," ECB Executive Board member Benoit Coeure said in a Frankfurt speech on Wednesday. "We see it as a possible risk. We need to be ready to act against this possible risk."

February prices in Portugal and Slovakia were both weaker than expected, mainly because of lower food and energy costs. In Portugal, prices fell by a monthly 0.3% after a 1.4% drop in January. In Slovakia, which has been a Eurozone member since 2009, prices slipped by 0.1%, both on a monthly and on an annual basis. Other Eurozone peripheral countries remain on the cusp of falling prices, with annual consumer inflation running at just 0.1% in Spain, 0.2% in Ireland and 0.5% in Italy. International Monetary Fund chief economist Olivier Blanchard warned this week that falling prices in the Eurozone periphery were very much a double-edged sword.

"On the one hand it would certainly improve their competitiveness and help exports but on the other hand it would increase the real interest rate and the real value of debt and so reduce domestic demand," Blanchard said in a Handelsblatt interview.

"The risk of deflation, especially in the Eurozone, definitely exists," he added.

Analysts said that falling prices in the periphery were unlikely to be enough to sway the ECB because of the rapid structural changes that were occurring as countries try improve their competitiveness.

Countries like Greece and Cyprus "are facing necessary deflationary forces because they are going through enormous adjustments," ING Chief Economist Carsten Brzeski said. "As long it won't lead to deflation expectations, the ECB will stick to the same old story," he said.