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13 January 2015

How tough can easing be? 

After inflation in the eurozone went into reverse in December, the European Central Bank is finally moving toward implementing its long-discussed plans for buying bonds to stimulate the continent’s economy.

Last month, consumer prices across 18 countries that have adopted the euro – Lithuania became the 19th on January 1st – were 0.2% lower than a year earlier. Although the biggest single factor is falling oil prices, the trend could be a sign of a lack of spending by individuals and investing by companies. Discounting energy and food prices, eurozone inflation actually rose slightly in December, to 0.8%.

Still, economists point out the dangers of Europe becoming caught in a deflationary spiral that is hard to escape. Japan experienced a similar phenomenon in the 1990s, and economic growth has yet to fully recover there.

Unless policy-makers can engineer a return to expansion, many European countries, including crisis-hit Greece and Spain as well as the big economies of France and Italy, will struggle to reduce historically high levels of unemployment – which also depresses demand for goods and services.

Analysts are now convinced that the ECB will announce its readiness to buy eurozone government bonds, as the US, UK and other central banks have done over the past few years to give their economies a boost.

There is opposition, especially in Germany, where fearful memories remain of 1920's hyperinflation, and where critics of the plan say bond buying goes beyond the ECB’s powers. But many economists believe action is essential, as much as anything to restore confidence that the central bank is committed to kick-starting growth.