Why deflation is good for Europe

Why deflation is good for Europe.

In today's global economy there is no more important than the price of oil, says the site project-syndicate.org Daniel Gros, director of the Center for European Policy Studies in Brussels (Center for European Policy Studies - CEPS).

More than 80 million barrels are produced (and consumed) per day, and much of this production is traded on international markets. So sharp fall in oil prices - about $ 110 a barrel last year to about 60 today - saves hundreds of billions of dollars of oil importers. For the European Union and the United States of America profit fall in oil prices is worth about 2-3% of GDP.

Many observers, however, say that cheap oil has its downside, as exacerbated the deflationary trends in developed countries and the already seem stuck in the trap of low growth. According to this perspective, the sharp decline in oil prices will make it more difficult for the central banks of these countries to achieve the level of annual inflation rate of 2%, which most of them have set as a goal.

It is believed that this deflation is bad because it increases the burden of debt servicing, particularly in the troubled economies of the periphery of the eurozone (Greece, Ireland, Italy, Portugal and Spain).

However, this fear is unfounded, since it was based on a misunderstanding. What is important for debt servicing, is the income of the debtor, not the price level. With the fall in oil prices should increase the real income of households. Lower oil prices facilitate the highly indebted households in the US or in the periphery of the eurozone. Therefore falling consumer prices should be seen as a good sign.

Moreover, although most of the savings from lower energy costs may initially be expressed in higher profits over time competition will force companies to transfer some of these extraordinary benefits to consumers or employees (in the form of -Low prices or higher wages).

The decline in consumer prices in the euro area is currently experiencing should therefore be seen as a positive development for all importers of energy. Periphery of the eurozone, in particular, may be hoping for the ideal combination of low interest rates and more favorable euro exchange rate and growth in real income as a result of cheap oil.

In a deflationary environment, lower oil prices seems to impede the European Central Bank in achieving its target of 2% annual inflation, but in reality are of great benefit to Europe, particularly its most troubled economies.