How to fight Europe’s demons of deflation

Deflation terrifies economists because once it starts, they have no idea what to do about it. When demand in an economy shrinks, companies cut jobs, and with fewer employed demand shrinks even more. The deflationary spiral is self-reinforcing. Central banks can cut interest rates to near zero and slosh money around like drunken lottery winners, but once hope flickers and dies, there is nothing they can do to persuade anyone to invest in the economy. Deflation took hold in Japan in the early 1990s and despite the government straining every sinew, its economy is still ailing 20 years on.

Europe is right, then, to be in a panic. Inflation across the eurozone is just 0.4 per cent and over the past year eight of its economies, including Greece, Hungary, Sweden and Poland, have recorded annualised rates of negative inflation, falls in wages and prices of a kind Britain has not seen since 1960.