Why Deflation is Good News for Europe
BRUSSELS – In today's global economy, there is no price as important as that of crude oil. More than 80 million barrels are produced (and consumed) daily, and a large part of that output is traded internationally. Thus, the sharp fall in the crude-oil price – from about $110 last year to around $60 today – is yielding hundreds of billions of dollars in savings for oil importers. For the European Union and the United States, the gain from that decline is worth about 2-3% of GDP.
For Europe, the benefits of cheap oil might grow over time, because long-term gas-supply contracts are to a significant degree indexed to the oil price. This represents another advantage for Europe, where prices for natural gas were, until recently, several times higher than in the US, which had been benefiting from lower-cost shale energy.
But many observers have argued that cheap oil also has a downside, because it exacerbates deflationary tendencies in the advanced countries, which already seem to be mired in a low-growth trap. The sharp fall in oil prices, according to this view, will make it even harder for these countries' central banks to achieve the 2% annual inflation rate that most have targeted in fulfilling their price-stability mandate.
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