Europe is not at risk of sliding into "full deflation" but the current rate of inflation is dangerously low, European Central Bank Vice President Vitor Constancio said on Saturday. Many fear the euro zone, where annual inflation fell far short of the ECB's medium-term target in October, could be set for a Japanese-style lost decade of deflation and recession.
During a debate in central Italy, Constancio said he did not think "that in Europe there is the risk of falling into full deflation" because nominal salaries would have to fall in all member countries "and this cannot happen". It was not immediately clear what he meant by "full deflation". Constancio echoed a pledge made by ECB President Mario Draghi on Friday to take action to raise inflation, which ran at 0.4 percent in the single currency bloc last month.
"This has to be done with monetary policy," Constancio said when asked who should intervene to raise prices. "It is the ECB's responsibility." But living with inflation so close to zero is dangerous in itself, Constancio said, because it makes it harder to repay public and private debt, and impedes economic growth. He added that inflation measurement is often inaccurate and that if the reading is "close to zero, in reality it is already at minus one".
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