The Eurozone crisis is back

By on October 21, 2014

Inflation is just 0.3 percent, markets are tanking and the Greek ghost walks again.

There’s a cold wind blowing over from Europe as the twin fears of deflation and a triple-dip recession stalk the Eurozone, while Greece wobbles closer to the edge yet again.

Inflation slipped to 0.3 percent in September, according to Eurostat, from 0.4 percent in August and 1.1 percent a year earlier. The Eurozone now looks perilously close to full-on deflation and the Japan-circa-1997 dangers that it brings: A downward spiral of falling prices and economic contraction.

Prices actually fell in five countries, including Italy and Spain. The biggest drop, though, was in Greece, where inflation was -1.1 percent in September.

There’s a definite whiff of déjà vu about Greece right now. The Athens Stock Exchange has dropped 13 percent since Monday, while the yield (which moves inversely to price) on the country’s 10-year bonds spiked up towards nine percent this morning, having been just 6.6 percent a week ago.

Investors are freaking out about the world economy generally – markets are sliding across the world and no one, especially if they’re a trader, likes being caught on the wrong side of a trend. But Greece, where unemployment is still a generation-destroying 26 percent, is once again high up the list of ‘Things to Panic About’ due to another bout of political instability.

Its coalition government survived a no-confidence vote last week, but it is looking increasingly likely that it will fail to get the three-fifths parliamentary majority it needs to elect a new president in February. That would mean snap elections, and leading the polls is Syriza, a radical left-wing party that wants to reverse austerity, write off 50 percent of the country’s debt and maybe even leave the Euro.

More generally, sliding inflation and other rubbish data is making it look more likely that the Eurozone will slip into a triple-dip recession. Germany, the union’s biggest economy, shrank 0.2 percent in the second quarter of this year, and many economists are expecting it to contract again.

No wonder European stock markets are taking a hammering. The German DAX is down 1.73 percent today, having slid more than 11.5 percent so far this year. France’s CAC 40 has fallen 2.24 percent, after dropping 10.58 percent in the last six months.

Italy’s exchange is down 3.45 percent, meaning it’s fallen eight percent in the last five days, while Spain’s IBEX 35 is down 3.48 percent.

That’s an awful lot of red on traders’ screens, which all adds up to even worse news for the Eurozone’s economies, companies, and trading partners – which, of course, includes us.

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