IBNA Op-Ed/Deflation, price of oil and 2015…

IBNA Op-Ed/Deflation, price of oil and 2015…

By Zef Preci*

Traditionally, negative inflation or deflation has been considered to occur as a result of the vicious cycle of economic slowdown. Currently, the Euro zone is facing a 0.2% deflation, which means that inflation is less than zero.

EUROSTAT data indicate for a significant drop of the price of crude oil in the international market. Thus, the price of energy has dropped by 6,3% in December compared to a year ago and if the effect of this factor was to be excluded, inflation on this month would be at the same level as the previous month (November) at 0,6%.

This situation which is encountered for the first time since the start of the crisis in 2009, has forced the European Central Bank to take measures in order to stimulate the economies of this zone in order for inflation to be under 2%.

The reality is that different analysts and experts of developments in the capital markets, consider this uncommon situation in the Euro zone as a failure of tax and monetary policies followed by governments of EU member countries and the European Central Bank in response to the crisis and in order to find a way out of it.

Meanwhile, economies of these countries face the problem of unemployment, situation in Greece, etc. In Greece, presence of deflation increases the cost of its debt, something which can have its effect in the polls which will take place in two weeks in order to stop public support for SYRIZA and extremist forces that support it, to prevent them from coming into power.

Among the countries of the Euro zone, Greece has the highest level of unemployment, 25,7%, followed by Spain with 23,9% (September 2014), while the countries with the lowest level of unemployment rate are Austria and Germany-namely 4,9% and 5% (November 2014).

Meanwhile, the significant fall of the price of crude oil will have a positive effect in those economies of Euro zone that import and other countries that benefit from this price.

This has come as a result of the reduction of costs for many businesses and the fact that consumers have more disposable cash in their hands. Nevertheless, if this deflationist situation persist, as it’s the opinion of the majority of experts of the field, the negative implications for the citizens and the problems that relate to the governments that have debts, remain serious.

Thus, if incomes for the citizens and the collection of budget revenues continue to fall, the holding of debts under control remains a very difficult task for the governments of the Euro zone.

I believe that this deduction is also valid for the weak Albanian economy. In spite of the silence of responsible institutions for fiscal and monetary policies about the risks that the long expected deflation of the Euro zone, the effects are present.

We have a lack of powers and information on this highly complex problem, or perhaps, the Oversight Committee of the Bank of Albania (under construction), is working on the respective policies which must be followed during 2015.

It remains to be seen, but nevertheless, I don’t think the imitation of the decision of the European Central Bank (which has historically occurred with our monetary policy) will help in this case.

The emergence of negative inflation (deflation) in the Euro zone, led to an exchange rate of 1.182 of the Euro with the American dollar in the past nine years. Of course, the exchange rate is dominated by a number of factors such as the interest rates, supply and demand, the dynamic of economic growth, political circumstances, etc.

Experts admit some kind of double negative correlation of the American dollar with the price of oil.

The meeting of the Board of the European Central bank has been scheduled to take place on January 22 and it’s expected to take important measures in order to stop deflation in the Euro zone, although Germany is not in favor of printing easy money under these circumstances.

Different forecasts talk about a further fall of the price of crude oil, but also the presence of deflation in the Euro zone until the end of 2015 or March 2016.

*Expert of economy, Executive Director, Albanian Center for Economic Research – ACER

** The opinion of the author doesn’t necessarily represent IBNA’s editorial line