Wolfgang Münchau has a good up-ed on the risk of deflation in the euro zone, while I do not agree with everything Wolfgang says I think he is 100% right about the significant risk of deflation in the euro zone and that bold policy action is urgently needed to curb deflationary pressures in the euro zone.
I particularly find this paragraph interesting:
Remember what happened in Japan? Once its economy settled to a new steady state with negative inflation and zero growth rates during the 1990s, it got stuck in a hole. There is still a dispute over whether fiscal or monetary policy is the more suitable instrument in such a situation. But there is no dispute that a policy mixture that consists of fiscal rigour, excessive monetary tightness and a refusal to deal with the zombie banks is not going to work. The ECB always says Europe is not Japan. Indeed, it is not. Europe’s position is potentially worse.
The only tools strong enough to stem deflation are unconventional. These could include purchases of sovereign and corporate bonds, bank bonds or even company shares. They could also include funding-for-lending schemes, support for small company loan securitisations or, in extremis, direct lending to companies. But the longer one waits and the longer deflation festers – the more it affects wage settlements and prices for goods and services – the harder and more costly it will be to get rid of.