The onset of deflation in the euro-zone and the recent developments in Greece have served as powerful reminders of the lasting effects of the region’s debt crisis. The ECB will seek to tackle deflation with additional monetary stimulus in the form of quantitative easing. But it is far from clear that it can prevent a Japanese-style prolonged period of weak activity and flat or falling prices. Meanwhile, Greece’s problems have highlighted the political and economic challenges still facing the periphery’s highly indebted economies. Against this background, there is a clear danger that the euro-zone crisis re-ignites, casting renewed doubts on the future of the currency union.
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