Deflation dangers persist

The recovery in the European economy appears to have picked up a bit of speed in the early months of 2014. The euro-zone now looks set to expand by 1% or more this year, a significant improvement on last year’s contraction, and even some of the peripheral economies may return to growth. Nonetheless, growth is likely to remain far too weak to make serious inroads into the spare capacity and high unemployment across the region, or to prevent public debt ratios in the periphery from rising further. As such, the danger of a Japanese-style bout of deflation in the currency union will persist unless policymakers take more decisive steps to boost the pace of recovery.