Slow-growth Euro zone nations risk deflation, and persistent debt concerns put the Euro zone's future in doubt, the International Monetary Fund warned today. Companies and households hesitant to spend because they hope prices will fall in the future can be pushed into bankruptcy as real estate and other asset prices fall. Banks can be saddled with potentially ruinous levels of bad loans.
Countries such as Italy and Spain, where growth is slow and governments are counting on tax increases to reduce their staggering debt, face a 25 percent risk of consumer price deflation before 2014, the fund said.
Deflation, falling prices, can lead to a spiral in which price decreases lead to lower production, which leads to lower wages and demand, which in turn leads to further price decreases.
A deflationary spiral would additionally increase the difficulty for countries like Italy and Spain to control government debt because falling prices and wages would further depress tax receipts, the fund said.
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