Why Deflation is Good News for Europe
Many observers have argued that cheap oil has a downside, because it exacerbates deflationary tendencies in the advanced countries, which already seem to be mired in a low-growth trap. But this fear is unfounded, because it is based on a misunderstanding about what matters for debt-service capacity.
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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.