Why Deflation Is Such A Big Worry For Europe : Parallels Some of the weakest countries, such as Spain and Italy, are experiencing a broad drop in incomes and asset values. Deflation is a painful process that can be hard to reverse once it starts.
NPR logo

Why Deflation Is Such A Big Worry For Europe

  • Download
  • <iframe src="https://www.npr.org/player/embed/360186496/360300832" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Why Deflation Is Such A Big Worry For Europe

Why Deflation Is Such A Big Worry For Europe

  • Download
  • <iframe src="https://www.npr.org/player/embed/360186496/360300832" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

RENEE MONTAGNE, HOST:

Even as the U.S. economy is growing at a healthy rate, European economies are going in the opposite direction. Much of the continent is on the brink of another recession. Some of the weakest countries, like Spain and Italy, are experiencing deflation. As NPR's Jim Zarroli reports, deflation is a painful process that can be hard to reverse once it starts.

JIM ZARROLI, BYLINE: Europe's long, slow economic downturn has taken its toll on Javier Oroz Rodriguez, who owns a butcher shop in downtown Madrid.

JAVIER OROZ RODRIGUEZ: (Through translator). We've lowered our prices in various stages, bit by bit. So now we're charging about 10 percent less than we did a few years ago. It's really difficult because I've got expenses. So it's tough.

ZARROLI: Things aren't all bad, however. He says the price of some of the meats he buys have come down, so his costs are lower.

RODRIGUEZ: (Through translator). Lamb is more expensive than it was a few years ago. But beef is a bit cheaper, and so are pork and chicken.

ZARROLI: For business owners like Rodriguez, deflation has increasingly become a fact of life, not just in Spain, but in Portugal, Greece and Italy. Ashoka Mody is a professor of international economic policy at Princeton.

ASHOKA MODY: What we have seen is that the countries that experience the most distress are also the countries where the deflation threat is the greatest.

ZARROLI: In many parts of Europe, incomes and prices are actually falling. And even in healthier economies such as the Netherlands, costs are rising more slowly than they were just a few years ago. That might not seem so terrible. And economist Michael Bordo of Rutgers University says deflation can sometimes be a good thing if it's caused by something beneficial, like falling energy prices. But in a faltering economy like Europe's, it can be a disaster. Bordo says if people see that prices are dropping, they put off purchases.

MICHAEL BORDO: Then what they're going to do is they're going to figure, well, if I hold back on my expenditures - my decision to buy a car now because I know that next year, it's going to be 2 percent cheaper - well, that means that they're not spending.

ZARROLI: And when people in one country put off spending, it hurts the countries they buy from in a way that reinforces itself. It becomes a vicious cycle. And that's exactly what Europe doesn't want to see happening right now. Ashoka Mody says many of the countries experiencing deflation these days are among Germany's largest trading partners.

MODY: And we have seen in these last several months that as a consequence, the German economy has also slowed down considerably.

ZARROLI: And deflation can also hurt an economy in another way. When incomes are falling and assets are losing value, it becomes a lot harder for people to pay off debts. If they make good on their debts, they have less money left over to buy things, which only hurts the economy more. In the end, a lot of people are tempted to walk away from their debts, says Michael Bordo.

BORDO: It's more likely that they'll default on their loans. And it's more likely that banks that have made the loans will end up taking losses and may fail.

ZARROLI: As more banks fail, he says, the troubles for the global economy intensify. And Mody says that can cause huge ramifications throughout the financial markets.

MODY: And I think that's the risk that should be of great concern to policymakers on both sides of the Atlantic.

ZARROLI: The European Central Bank has often been behind the curve when it comes to addressing the region's economic problems. The specter of deflation in places such as Italy and Spain is one factor that's forcing European officials to reassess their strategy and look for new ways to revive the economy. Jim Zarroli, NPR News.

Copyright © 2014 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.