Deflation in the Eurozone is the latest potential financial crisis to hit British expats in retirement destinations like Spain, France and Portugal.
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The European Central Bank admit deflation is a real concern and is putting checks and balances in place to try to avoid falling prices.
Although a cheaper cost of living is welcomed by many, deflation is as damaging to an economy as raging inflation.
The main problem is as the price of goods and services fall, people hold on to their cash in anticipation of a further price reduction.
Deflation in the Spanish housing market is a good example.
Policies in place
As the heat in the market of a few years ago rights, prices have dropped by around 50% in recent years, and although property bargains are on the market for buyers and investors, they are not stepping in to purchase.
Their hope is prices have not yet bottomed out and even better bargains will come to the market.
As property is not selling, the supply increases as demand falls, pushing down prices.
European Central Bank president Mario Draghi notes the bank is wary about deflation as the Eurozone inflation drops to 0.8% against a target of 2%, but feels the risk is ‘limited’.
“The ECB has drafted non-standard monetary policies to guard against deflation and is ready to take whatever action is needed,” he said.
“Any move to deflation will be countered by the bank using whatever tools are available to right the problem.”
Falling euro values
Draghi’s warning saw the euro fall against the US dollar and Japanese yen.
The ECB faced bitter criticism from foreign governments and the markets over the handling of the Eurozone sovereign debt crisis, and international confidence that European Union governments in the Eurozone will act decisively is low.
Draghi pledged to keep interest rates at their current or low levels for as long as is needed and said slack in the economy would tighten, with inflation moving back towards 2% during the recovery.
He also tried to disconnect the euro exchange rate from the economic recovery and the cost of living by claiming the value of the euro was not relevant to Eurozone economy.
“The rate is not relevant according to our assessment of how much it affects prices,” he said. “We’ve looked at the data over the past 18 months and cannot see that it has had any significant impact.”
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