For Europe, cheap oil is all boon and little bust
The long-feared threat of European deflation finally materialized at the end of 2014, according to data released today. Consumer prices in the Eurozone fell for the first time since the 2009 global financial crisis. But it’s not entirely bad news: Prices are falling in large part because oil is so cheap, which acts as a windfall for consumers and a stimulus for Europe’s economy.
“It is a massive stimulus for Europe, and it also hits the right people, it is going to everybody, there are lots of knock-on effects for industries,” says Ken Rogoff, a Harvard University economist.
Since Europe imports most of its energy, cheap oil is all boon and little bust. Rogoff says the problem is that the European Central Bank has been trying to create a healthy level of inflation for years. “What makes it a little bit difficult for them is they’ve been struggling to get inflation up to 1 percent and ideally 2 percent,” he says.
Not all countries in the Eurozone are seeing outright deflation. Germany, for instance, is still OK. But the central bank will be under pressure to act. “The worry is, is that you could end up, in some countries, getting into a deflationary spiral,” says Howard Archer, chief European economist for IHS analysts. “There would be a risk of that happening, in Italy, for example, and perhaps Greece as well.”
The next trick the central bank has to pull off, according to Archer: Decide which countries should receive stimulus and how much.
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