ARE YOU THE GOOD DEFLATION OR THE BAD DEFLATION?

ECB cuts eurozone rates to 2% to spur growth (Tony Major and Bettina Wassener, June 5 2003, Financial Times)

The European Central Bank on Thursday cut interest rates by half a point to 2 per cent, their lowest level since the second world war, amid growing gloom at the state of the eurozone's economy.

Amid fears of deflation in Germany, short-term interest rates in the country have fallen to their lowest level since 1875, when records began. [...]

The bank is expected to lower its GDP growth forecast for this year from 1 per cent to about 0.7 per cent or less after the eurozone economy ground to a halt in the first quarter and shows signs of contracting in the second.

Economists said the ECB had left the door "wide open" to further cuts and economic data continues to disappoint.

Ken Wattret, economist at BNP Paribas, said: "It has lost faith in its forecast recovery. It has always been just around the corner - but never appears."

Holger Schmieding, economist at Bank of America, said the ECB was likely to cut again in September, as the surging euro would trigger more revisions to inflation and growth forecasts.

Mr Duisenberg dismissed talk of eurozone deflation, insisting it was not a meaningful concept in a currency union.

But economists warned that deflation, a sustained fall in prices, was a serious risk in Germany and a threat to the region.

Gwyn Hacche at HSBC said: "If deflation happens in Germany - a third of the eurozone - some of the smaller countries - the Netherlands, Austria, Belgium - will also be under threat."

The brutal truth for Europe is that when our economy catches a cold, they get pneumonia. If they were ever going to be taken seriously as an economic rival, their chance to prove themselves was in the post-9/11 period. They failed. Posted by Orrin Judd at June 6, 2003 8:51 AM