Europe must inject stimulus into its economies to prevent deflation, says Ambrose Evans-Pritchard, international business editor of the London Telegraph.
And with fiscal stimulus ruled out because of Europe’s huge debt burden, the European Central Bank (ECB) will have to carry the load, he maintains.
“Euroland's authorities are inflicting a triple shock of fiscal, monetary, and currency tightening on a broken economy,” he wrote.
“They are doing so in a region where ... growth barely scraped above zero over the winter ‘recovery.’”
So what’s the answer?
“Europe must take immediate action to prevent being drawn into a deflationary vortex,” Evans-Pritchard said.
“Spiraling public debt precludes further Keynesian spending, so this must come from central bank stimulus. Tight fiscal policy offset by ultra-loose money is the only option for Europe, the U.S., and Japan.”
Instead, the ECB is tightening now. And the stress tests for banks are no panacea, Evans-Pritchard says.
“In Europe, sovereign states are themselves the risk, and a dysfunctional EMU is the Achilles heel.”
Bond investors apparently disagree with Evans-Pritchard. Fixed-income markets have stabilized in Spain, Portugal and Greece after plunging earlier this year amid the debt crisis.
“Europe has had a pretty good crisis,” Jacob Funk Kirkegaard, a fellow at the Peterson Institute for International Economics, told The New York Times.
“In the short term, it made a number of very constructive decisions that had the effect of calming down the markets.”
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