There is a certain level of controversy surrounding the issue of whether moderate inflation or even deflation are really harmful for the economy or more a byproduct of necessary adjustments being made by countries.
“Deflation driven by technological innovation and productivity growth is good for the economy, while deflation driven by a weak economic environment is harmful,” say Cortal Consort experts.
In that sense, the introduction of important structural reforms may explain the evolution of prices in Spain, Portugal or Greece, but not the Netherlands, France or Italy. In these and other cases, economic weakness is the explanation. The output gap, which assesses the difference between actual and potential GDP, is “a good measure of slack remaining in the economy and, for all countries of the Eurozone except Germany and Malta, the gap is still considerable”.