Skip to content
Subscriber Only
Markets
Economics

Europe’s ‘Nonsense’ Output Gaps Hide a Big Deflationary Risk

  • IIF says gap in euro periphery larger than consensus estimate
  • Low core inflation remains a problem for the euro area
A man smokes a cigarette outside a building in Madrid.

A man smokes a cigarette outside a building in Madrid.

Photographer: Angel Navarrete/Bloomberg

The euro-area economy is facing a bigger deflationary risk than estimated, according to the Institute of International Finance, which is heavily critical of output-gap calculations for the region’s periphery.

The Washington-based institute says some figures for Spain and Italy “strain credulity,” given how those economies have performed over the last decade. It sees far more spare capacity, which means it’s harder to raise inflation, something the European Central Bank is still struggling to do even after years of stimulus.