How Much Can The ECB Do About Deflation?

Here is my nomination for misleading headline of the year-so far.  

Fed, ECB prepare to tackle deflation head-on

That’s from Reuters this evening. It’s part of an article in which Janet Yellen is quoted extensively about the Fed’s intention to not let deflation get the better of the country. Lucas Papademos, vice president of the ECB, is also quoted as saying that the ECB is prepared to continue to lower rates to keep the deflation wolf at bay. Unfortunately, this is the only bullet they have to fire.

Don’t get me wrong. I’m a fan of the European Union and their system. I think that after all of this gets sorted out we should seriously look at fixing exchange rates among currencies as a prelude to a world wide currency. The problem is that right now all they can do is manipulate interest rates. The fiscal stimulus has to come from the individual member countries and the scope and size of that stimulus is a subject of much discussion and disagreement.

It remains to be seen if that flaw can be overcome or if it might be fatal.

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