“Significant increases in poverty among those of working age are among the most tangible social impacts of the economic crisis and even a gradual reduction of unemployment level may not provide guarantees for a reversal of this situation.” These words come from inside the European Union and hint at the main repercussions of the euro crisis. They are included in the latest Employment and Social Developments in Europe report which also takes a stab at the quality of jobs, the benefit system, or gender gaps among other issues.
The report was published hours before the International Monetary Fund raised its global growth forecast, including a positive revision for the euro area, which they consider “is turning the corner from recession to recovery.” The IMF predicts economic growth there will strengthen to 1% in 2014, in its newly released World Economic Outlook. A reason to celebrate — yet a stronger one to remain cautious. That upbeat mood might not reflect a reduction of record unemployment numbers in several euro countries.
The Fund is very much on the side of the pessimists here, warning that the rebound is uneven and worrying about the risks of deflation:
With inflation likely to remain below target for some time, longer-term inflation expectations might drift down. This raises the risks of lower-than-expected inflation, which increases real debt burdens, and of premature real interest rate increases, as monetary policy is constrained in lowering nominal interest rates. It also raises the likelihood of deflation in the event of adverse shocks to activity.
Yet from the consumer perspective — especially in they eyes of the millions of unemployed Europeans and the above mentioned increasing poor — this could be beneficial. While the financial world strongly opposes the idea, overall falling prices would benefit those with lower purchasing power. But the IMF will combat that notion to the furthest extent: “If inflation is the genie, then deflation is the ogre that must be fought decisively,” said IMF chief Christine Lagarde a week ago.
Inflation is stubbornly low across the euro zone, under 1% on average, despite the money that the European Central Bank has been pumping into the economies it helps regulate. On the other hand, if deflation becomes sluggish economic growth is hard to achieve. The negative effects could be noticed even prior to the inflation rate falling below 0% (also known as a negative inflation): if people believe that prices will fall further in the short term they can easily hold off from spending, which consequently causes a drop in demand.
It’s a tricky moment for the E.U. Its every move is being closely scrutinized. All these issues will be on the table — and included in the presentations — of the annual World Economic Forum that commences Wednesday in Davos. Acting in the public interest is one of their alleged core principles, something many find hard to believe taken into account global poverty and unemployment levels. Even more so if at the congregation of the powerful and mighty it goes unmentioned that the world’s 85 richest people own as much money, €81.2 trillion, as the world’s 3.5 billion poorest. Oxfam’s recent released figure ( included in the report Working for the Few: Political capture and economic inequality) should encourage those in attendance at the WEF this week to recalibrate their priorities.