The risk of deflation is now increasing across Europe. Eurozone inflation fell in December 2013 to 0.8%, compared with 0.9% the previous month. The figure, well below the 2% target, has increased pressure on the European Central Bank (ECB) and Germany, which pull most of the strings in boosting consumer spending and investment in Europe. Top US and European Commission officials have called on Berlin to foster domestic demand in Germany to speed up recovery in the region.
Meanwhile, the ECB's Governing Council meets on 9 January, and the urgent need to tackle the deflationary bias is high on its agenda. The President of the Frankfurt-based institution, Mario Draghi, has reiterated several times over the last weeks that the ECB is ready to act to invigorate the eurozone economy, but has no preference for any particular instrument (negative deposit rates, an asset purchase programme or a new long-term refinancing operation).
The inflationary relapse put weak internal demand in Germany again into the spotlight, two months after the European Commission opened an in-depth investigation into the country's trade surplus. US Treasury Secretary Jack Lew said that "we continue to believe that policies that would promote more domestic investment and demand would be good for the German economy and the global economy". Lew visited Berlin to urge German Finance Minister Wolfgang Schauble to rebalance Berlin's economic model and thus foster growth in the eurozone as a whole. On the eve of his visit, the US official said in Paris that "it is clear that some countries have the capacity to stimulate more growth and demand than others do," The Financial Times reported.
The US and Germany have for months been engaged in a...