Deflation Looms, Parte Dos: European Edition

Last week, I wrote about the threat of deflation after the news that U.S. consumer prices dropped last year, the first time since 1955. Dagblog's Deadman played down the risk, and I agreed that current deflation levels were not a threat. But now it seems that deflation is knocking a bit harder at Europe's door, particularly Spain's.

“Alarm bells are going off,” said Lorenzo Amor, president of the Association of Autonomous Workers, which represents small businesses and self-employed people. “Economies can recover from deceleration, but it’s harder to recover from a deflationary situation. This could be a catastrophe for the Spanish economy.”

Spain's unemployment rate is already at 15.5%, a rate not seen in the U.S. since the Great Depression, and could reach 20% this summer. The jobless rate for those under 25 is now at 31.8 percent.

While deflation is most serious in Spain, its touch has been felt across Europe, particularly Luxembourg, Portugal and Ireland. The risk of a deflationary spiral is growing because of Europe's tepid response to the financial crisis. Economists like Paul Krugman have excoriated European leaders and conservative bankers at the European Central Bank for stubbornly refusing to drop interest rates or enact stimulus plans to jump start their economies. That means that the cost for easing the global financial crisis is being borne by the countries that have responded aggressively, including the U.S. and U.K. As a result, Europe will likely recover more slowly the U.S. and U.K., just as it has after past recessions. France and Germany will slouch along, but the brunt of the financial hardship will fall on Europe's poorer nations which can ill afford the austere measures of the European Union.

That is, unless the whole world is swallowed by a deflationary vortex, in which case we're all screwed.