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Beer Goes Flat As Deflation Stalks Europe

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The euro zone's economic malaise is increasingly worrisome for the rest of the world. This weekend's Group of 20 meeting in Brisbane, Australia, provides an unmissable opportunity for the global community to pressure Europe's leaders to do more to reform their national economies -- particularly with regard to labor-market rules -- and to acknowledge that German-inspired fiscal stringency needs to be relaxed.

In a speech yesterday, U.S. Treasury Secretary Jack Lew roasted European officials, saying "the world cannot afford a European lost decade." This week, Bank of England Governor Mark Carney slashed his forecasts for U.K. growth, citing euro-area stagnation. And the outlook for the bloc is still deteriorating.

European companies appear to be struggling to generate any revenue growth, based on the most recent quarterly earnings reports from the members of the Stoxx Europe 600 index. Sales shrank by 0.09 percent in the most recent quarter, according to Bloomberg data, compared with a 4 percent expansion for companies in the Standard & Poor's 500 index.

The Trouble With Falling Prices

The deflationary backdrop in the region means Europe's companies have very little ability to raise prices, so their margins are under pressure. Even beer profit is proving elusive. Today's first-half profit report from SABMiller, the world's second-biggest brewer after Anheuser-Busch InBev, illustrates how margins in Europe lag those in the rest of the world:

Source: SABMiller

The danger of deflation grows every month. In October, consumer prices in Germany declined at a monthly pace of 0.3 percent. Tomorrow's report for the euro region is expected to show prices were unchanged, and eked out a 0.4 percent annual gain that's far below the European Central Bank's 2 percent target:

Economists predict that the bloc will expand this year by just 0.8 percent, a worse performance than just about anywhere else in the world. In the U.S., growth is expected to reach 2.2 percent; in Japan, 1 percent; in Canada, 2 percent; and in the U.K., 3 percent. The world's 10 biggest economies are expected to collectively expand by more than 1.7 percent.

New stimulus plans in Europe could add at least 2 percent to global growth, doubling the G20's expansion target, the Organization for Economic Cooperation and Development said today. When even Japan is pulling out all the stops to resuscitate its economy, the euro region remains a drag on the rest of the world. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net