Eurostat yesterday (6 January) estimated that eurozone inflation dropped to 1.6% in December, the fifth consecutive downward adjustment since July, when the inflation figure peaked at 4%.
This confirms deflationary fears, a problem which is almost unknown to the European Central Bank (ECB), which has been busy fighting upward inflationary trends and trying not to overly exceed the official 2% target since its establishment in June 1998 (EurActiv 28/11/08).
Another indication of Europe's slide into recession is the fact that unemployment is expected to increase sharply. Last weekend (4 January), Employment Commissioner Vladimir Špidla told Czech television that unemployment in the EU would rise by 2% in 2009, bringing the rate close to 10%.
Among the countries hit worst by the crisis is Spain, where the unemployment rate has soared to 12.8%. Some analysts expect it to increase further to a massive 20% by 2010. In the UK, unemployment figures hit 1.825 million, their highest level since 1997. Experts expect it to reach two million this year and peak at three million in 2010, leaving one in 10 British workers unemployed (EurActiv 14/11/08).
While governments across Europe are busy deciding upon the size and the priorities of their national recovery plans, the ECB may also offer a helping hand by further decreasing interest rates to help oil Europe's economic engine.
Under normal conditions, an inflation rate clearly under 2% would be enough to trigger an ECB cut. However, doubts abound amid extraordinarily negative economic propects, because the Bank fears that further cuts may reduce its room for manoeuvre after having reduced interest rates three times in the last three months: from 4.25% to the current 2.50%.
Nevertheless, speculators are already predicting that the ECB will cut rates further at its next board meeting on 15 January. After an impressive recent appreciation, the euro has in fact begun to steadily lose value against the dollar and the pound.