Even a fall in the oil price is bad news for Eurozone

“Much of the world’s economic history over the past 70 years can be told in relation to movements of the oil price” - By Roger Bootle for The Telegraph

The below commentary on the article is written by Anthony O'Brien

That oil prices fell to $US78 per barrel last week, the lowest since 2010, is highly significant. Moreover, there is a good chance that they will fall much further.

Lower oil prices should benefit the eurozone economies. Indeed, much lower oil prices might be the only thing that can lift the eurozone economy from its current torpor. But there is also a threat that does not apply to the same extent to other countries.

This is because the eurozone is perilously close to deflation, that is to say, a point at which overall consumer prices fall. That may not sound so bad. Indeed, often it isn’t, but it is downright dangerous in an economy saddled with as much debt as the eurozone.

Deflation raises the real burden of debt and therefore increases the chance of a debt disaster, involving a sovereign default and leading to a new banking crisis.

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