Crisis stalks Europe again as deflation deepens, Germany stalls

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European Central Bank - Photo by Eric Chan

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral.

The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS.

Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7 in July, from -0.2pc the month before. Spain’s provisional estimate is for a fall of 0.3pc. The risk is that this cause inflation expectations to become unhinged and extremely difficult to reverse.

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