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More bad news unsettles Eurozone
January 7, 2015, 5:17 am

The European Central Bank is facing a plummeting euro, deflation, and a Greek political crisis that could unravel the 18-member Eurozone [Xinhua]

The European Central Bank is facing a plummeting euro, deflation, and a Greek political crisis that could unravel the 18-member Eurozone [Xinhua]

Recent Eurozone economic data and the unfolding political crisis in Greece will likely force the European Central Bank (ECB) to move quickly to launch a stimulus program known as quantitative easing.

In Asian trading on Wednesday, the Euro currency continued its dive as it retreated by more than five cents against the US dollar since December 25 and hit $1.187.

The new nine-year low for the Euro comes just ahead of a report which is expected to show that consumer prices in the Eurozone have fallen for the first time in 2009.

The data is likely to further raise fears of the likelihood of once powerful European economies suffering from rampant deflation.

Deflation is currently one of the biggest stumbling blocks for European economic growth.

Recent data has the average inflation rate among the 18-nation Eurozone at 0.3 per cent in the period up to the end of December 2014, and the ECB says that low inflation – or deflation – can postpone growth as consumers wait for bargain (lower) prices for goods and services.

Eventually, this leads to inadvertent stagnation.

The ECB has maintained that a two per cent inflation rate is ideal for Eurozone growth.

Earlier, the International Monetary Fund said it was concerned that European economies were not moving out of recession quickly enough.

In-Depth: A Worrisome Year Ahead for the Eurozone

Now, with earlier attempts – such as cutting interest rates to 0.05 per cent and maintaining current deposit rates to below zero at -0.2 per cent – the ECB has no choice but to respond to European market demands that it immediately institute quantitative easing.

Salvation for the Eurozone?

In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.

In 2009, the US Federal Reserve launched an $85-billion bond-buyback program to generate stimulus in the economy following the sub-prime mortgage crisis which led the world into recession.

ECB chief Mario Draghi had earlier spoken in favor of quantitative easing, with a possible start date some time in 2015.

Although he has publicly acknowledged that increased deflation data could move the ECB to more quickly embrace stimulus programs, he has recently not said much beyond an urgency “to act”.

“We are in technical preparations to adjust the size, speed and compositions of our [concrete] measures in early 2015,” Draghi told a German daily last week.

But the Greek political crisis, which began to unfold in December, is likely to throw a monkey wrench in the ECB’s plans.

Greeks are expected to head to the polls in a snap election on January 25 and there are fears that the leftist Syriza party – which opposes EU and IMF imposed austerity measures in the wake of the country’s debt crisis – could win.

The Greek economy began to unravel in 2009 when the government announced it could not meet its huge debt due to massive overspending.

Its budget deficit began to surge shortly after government financed the 2004 Athens Olympics.

The debt crisis was further exacerbated when the global economic crisis hit and the government feared defaulting on its loans. It had no choice but to seek help from the EU and the IMF.

Although the EU and IMF agreed to a total of over $300 billion in bailout loans, they demanded that the Greek government take severe measures to cut spending.

Athens agreed but this measure was met with millions of Greeks taking to the streets in protest sometimes with violence reported between demonstrators and police.

The Syriza party, which has gained popularity in recent months, sees the election as a vote on the merits of the current austerity agreements with the EU and IMF and will likely push for debt restructuring – or even a write-off.

It is unclear how any new government that emerges from the elections will work with the ECB.

Draghi and his fellow policy makers, who will have hands full regarding quantitative easing, will then face difficult questions about the possibility of Greece withdrawing from the Eurozone and the impact that would have on the other 17 member nations.

The BRICS POST with inputs from Agencies.

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