EU: Is a Deflationary Crisis on the Horizon?

Sweden's Riksbank reduced interest rates from 2 percent to 1.5 percent June 21, drawing further attention to the steadily worsening European economic situation. With low levels of consumer spending and investor confidence, and high levels of unemployment and institutional angst, Europe could be on the cusp of a deflationary crisis. This is especially true for the core economies of France, Germany and Italy, which could endanger neighboring states that might be performing better. Europe already is operating with low interest rates and high levels of deficit spending — the traditional correctives for deflation. Europe's best hope could lie in the appreciation of the dollar.