ATHENS — In her upscale three-story beauty salon in a middle-class suburb of Athens, Doria Tsirigotis used to charge 30 euros for a haircut. But when a wrenching recession set in, her competitors started cutting their prices, first to 20 euros, then to 10 and even as low as 5 — or less than $7.
Ms. Tsirigotis tried to resist discounting her prices. But as her clients lost jobs or had their wages cut, she eventually lowered her rates. Soon, revenues dwindled and her debts mounted, and she had to let go of all but two of her 13 employees. Last month, she downsized to a tiny salon across the street, renamed Cheap ‘N’ Chic — more fitting to the times.
“When prices fall so much, you can’t not follow the trend,” Ms. Tsirigotis said, gazing at the now-darkened beauty boutique she ran for 20 years. “But in such an environment, no one wins.”
While consumers welcome lower prices, economists are worried that an outbreak of ultralow inflation across the 18-nation euro zone is doing more harm than good to the bloc’s economic recovery.
On Tuesday, Europe’s statistics agency reported that annual euro zone inflation slumped to 0.5 percent in May from 0.7 percent in April, falling further below the 2 percent level that the European Central Bank considers healthy. Even in Germany, which has been the euro zone’s stalwart economy, inflation fell to a 0.9 percent rate in May, its lowest level in four years.
The situation has grown so alarming that the central bank is expected on Thursday to take extraordinary measures to try to stimulate the economy. Not only is it expected to cut its main interest rate for the first time since November 2013, but analysts also anticipate it will start charging commercial banks to keep money in its vaults — the imposition of so-called negative interest rates — whose consequences might be hard to predict.
The central bank’s moves would be aimed at preventing low inflation from becoming outright deflation: a tailspin of falling prices and wages from which it can be difficult for economies to recover. In such an environment, consumers and companies may delay spending in anticipation that prices will fall further, which would only exacerbate the economic problems.
That problem plagued Japan’s moribund economy for two decades, and officials are only barely starting to halt the price declines.
After years of a debt crisis, a number of countries in the euro zone are grappling with the effects of economic lethargy. At clothing stores, cellphone companies and factories making items as disparate as aluminum and tiles, owners faced with slumping demand have been pressured to cut their prices. In hard-hit countries, wages have also fallen sharply from precrisis levels.
Especially in the most fragile economies, the dynamic is crimping growth and dampening government efforts to pay down debt, regain competitiveness and tackle unemployment.
“The big picture is that with low inflation, it is more difficult for debt to come down and for economic growth to come back, so you could have a period of stagnation,” said Reza Moghadam, the director of the European department at the International Monetary Fund in Washington. He recently coined the term “lowflation” to describe the euro zone’s dilemma.
Critics say the European Central Bank has delayed acting for so long that the euro zone economy already risks becoming stagnant like that of Japan — a charge that the bank’s president, Mario Draghi, has disputed. Instead, Mr. Draghi has said, the bank is waiting for further data to confirm that low inflation is widespread enough to warrant remedies.
Already deflation has troubled four euro zone countries — Portugal, Cyprus, Slovakia and especially Greece, which has sustained an 18 percent plunge in wages since 2008, and where high unemployment has contributed to a decline in prices for more than a year. Elsewhere in the euro zone, inflation is worrisomely low.
“Inflation is so low,” said Simon Tilford, deputy director of the Center for European Reform in London, “because wages have fallen sharply and consumer demand and investment have been depressed.” In addition, banks have curbed lending, stifling thousands of small and midsize businesses, which create the majority of jobs across the euro zone.
“So economies are not growing as much as they could,” Mr. Tilford said. “Human and physical resources are not being employed and prices are pushed down further.”
He is among economists who say the E.C.B. should be trying to push inflation much higher than its 2 percent target to lift prices and incomes. Doing so, they argue, would create a virtuous growth-and-investment cycle that would also help countries reduce their debt burdens.
But that is easier said than done. The bank’s benchmark interest rate is at 0.25 percent, already a record low for the euro zone. So plans to trim it slightly may produce only a modest stimulus. The bank is also expected to try prodding banks to lend, but how quickly that would lift deeply troubled countries is unclear. And in the near term, it will be difficult to stoke inflation, even in Germany, where the rate is nearly 1 percent.
While the stimulus may help weak economies like those of Greece, Portugal, Italy and Cyprus, Germany is wary of allowing inflation to increase, which evokes dark memories of more unstable times in the days before World War II. Somewhat higher inflation in Germany would be useful to the other countries in the euro zone, say economists, by making workers in other countries more competitive. But if the bank’s efforts fall short, economists say, the low inflation in euro zone countries could turn into a deflationary trend, similar to what has taken hold in Greece.
“Greece may be a front-runner in terms of telling us what may happen to other euro zone countries that are subject to lowflation and confronting deflationary futures,” said Jens Bastian, an economist who was a member of the European Commission’s task force for Greece until this year.
Greek inflation fell below zero more than a year ago. Deflation is endangering the country’s ability to service its staggering €318 billion debt, as falling wages and slower economic activity reduce government tax revenue.
The economy has shrunk about 25 percent in the last five years, raising Greece’s debt as a percentage of economic output. Today, Greek debt has surged to 175 percent of gross domestic product, from 130 percent in 2010. While inflation would help reduce the interest Greece pays on the debt, deflation has made the interest burden larger.
The ripple effects of deflation are being felt throughout the Greek economy.
Lefteris Potamianos, a longtime real estate agent, was about to make a rare sale on an apartment in central Athens last month when the deal ground to a halt. Property values have fallen by 40 percent to 60 percent since 2008. The price of the apartment, once about €1 million, had dropped to €400,000. But the buyer held off to see if it would fall even more, a reflection of deflationary psychology.
Not only did Mr. Potamianos lose a badly needed commission, but notaries and lawyers also lost business, as did renovators poised to refurbish the apartment. And the Greek government, he said, would not reap around €70,000 in taxes on the transaction.
Across town, Nikolas Varelas, the owner of Varelas Home Design, has cut prices on the decorative tiles, designer faucets and other home furnishings in his showroom by 45 percent to 60 percent. Even with that deep discounting, “sales are still low,” he said, “because people don’t have money.”
That is partly because wages have slumped. To avoid having to dismiss anyone, Mr. Varelas cut salaries by 40 percent. Ms. Tsirigotis, the hair salon owner, also lowered wages and cut her own salary by two-thirds before eventually having to lay people off.
Over all, average hourly labor costs in Greece fell last year to €13.60, from €17 in 2010.
Such declines theoretically have a silver lining, by making Greek products more competitive for export. In reality, though, manufacturers say any savings has largely been negated by a raft of new taxes, including a 23 percent value-added tax and a 20 percent tax on energy costs, levied by the government to fill its coffers.
“There has been such a high level of taxation on production that these increases have far outstripped any benefits made on the wage front,” said Evangelos Mytilineos, vice chairman of the Hellenic Federation of Enterprises and the president of Mytilineos Holdings, one of Europe’s largest aluminum producers.
Mr. Mytilineos says he is hoping that the European Central Bank will help. “We are going through extraordinary circumstances in the periphery of Europe,” he said. “The E.C.B. needs to act with extraordinary policies.”
Ms. Tsirigotis tried to resist discounting her prices. But as her clients lost jobs or had their wages cut, she eventually lowered her rates. Soon, revenues dwindled and her debts mounted, and she had to let go of all but two of her 13 employees. Last month, she downsized to a tiny salon across the street, renamed Cheap ‘N’ Chic — more fitting to the times.
“When prices fall so much, you can’t not follow the trend,” Ms. Tsirigotis said, gazing at the now-darkened beauty boutique she ran for 20 years. “But in such an environment, no one wins.”
While consumers welcome lower prices, economists are worried that an outbreak of ultralow inflation across the 18-nation euro zone is doing more harm than good to the bloc’s economic recovery.
On Tuesday, Europe’s statistics agency reported that annual euro zone inflation slumped to 0.5 percent in May from 0.7 percent in April, falling further below the 2 percent level that the European Central Bank considers healthy. Even in Germany, which has been the euro zone’s stalwart economy, inflation fell to a 0.9 percent rate in May, its lowest level in four years.
The situation has grown so alarming that the central bank is expected on Thursday to take extraordinary measures to try to stimulate the economy. Not only is it expected to cut its main interest rate for the first time since November 2013, but analysts also anticipate it will start charging commercial banks to keep money in its vaults — the imposition of so-called negative interest rates — whose consequences might be hard to predict.
The central bank’s moves would be aimed at preventing low inflation from becoming outright deflation: a tailspin of falling prices and wages from which it can be difficult for economies to recover. In such an environment, consumers and companies may delay spending in anticipation that prices will fall further, which would only exacerbate the economic problems.
That problem plagued Japan’s moribund economy for two decades, and officials are only barely starting to halt the price declines.
After years of a debt crisis, a number of countries in the euro zone are grappling with the effects of economic lethargy. At clothing stores, cellphone companies and factories making items as disparate as aluminum and tiles, owners faced with slumping demand have been pressured to cut their prices. In hard-hit countries, wages have also fallen sharply from precrisis levels.
Especially in the most fragile economies, the dynamic is crimping growth and dampening government efforts to pay down debt, regain competitiveness and tackle unemployment.
“The big picture is that with low inflation, it is more difficult for debt to come down and for economic growth to come back, so you could have a period of stagnation,” said Reza Moghadam, the director of the European department at the International Monetary Fund in Washington. He recently coined the term “lowflation” to describe the euro zone’s dilemma.
Critics say the European Central Bank has delayed acting for so long that the euro zone economy already risks becoming stagnant like that of Japan — a charge that the bank’s president, Mario Draghi, has disputed. Instead, Mr. Draghi has said, the bank is waiting for further data to confirm that low inflation is widespread enough to warrant remedies.
Already deflation has troubled four euro zone countries — Portugal, Cyprus, Slovakia and especially Greece, which has sustained an 18 percent plunge in wages since 2008, and where high unemployment has contributed to a decline in prices for more than a year. Elsewhere in the euro zone, inflation is worrisomely low.
“Inflation is so low,” said Simon Tilford, deputy director of the Center for European Reform in London, “because wages have fallen sharply and consumer demand and investment have been depressed.” In addition, banks have curbed lending, stifling thousands of small and midsize businesses, which create the majority of jobs across the euro zone.
“So economies are not growing as much as they could,” Mr. Tilford said. “Human and physical resources are not being employed and prices are pushed down further.”
He is among economists who say the E.C.B. should be trying to push inflation much higher than its 2 percent target to lift prices and incomes. Doing so, they argue, would create a virtuous growth-and-investment cycle that would also help countries reduce their debt burdens.
But that is easier said than done. The bank’s benchmark interest rate is at 0.25 percent, already a record low for the euro zone. So plans to trim it slightly may produce only a modest stimulus. The bank is also expected to try prodding banks to lend, but how quickly that would lift deeply troubled countries is unclear. And in the near term, it will be difficult to stoke inflation, even in Germany, where the rate is nearly 1 percent.
While the stimulus may help weak economies like those of Greece, Portugal, Italy and Cyprus, Germany is wary of allowing inflation to increase, which evokes dark memories of more unstable times in the days before World War II. Somewhat higher inflation in Germany would be useful to the other countries in the euro zone, say economists, by making workers in other countries more competitive. But if the bank’s efforts fall short, economists say, the low inflation in euro zone countries could turn into a deflationary trend, similar to what has taken hold in Greece.
“Greece may be a front-runner in terms of telling us what may happen to other euro zone countries that are subject to lowflation and confronting deflationary futures,” said Jens Bastian, an economist who was a member of the European Commission’s task force for Greece until this year.
Greek inflation fell below zero more than a year ago. Deflation is endangering the country’s ability to service its staggering €318 billion debt, as falling wages and slower economic activity reduce government tax revenue.
The economy has shrunk about 25 percent in the last five years, raising Greece’s debt as a percentage of economic output. Today, Greek debt has surged to 175 percent of gross domestic product, from 130 percent in 2010. While inflation would help reduce the interest Greece pays on the debt, deflation has made the interest burden larger.
The ripple effects of deflation are being felt throughout the Greek economy.
Lefteris Potamianos, a longtime real estate agent, was about to make a rare sale on an apartment in central Athens last month when the deal ground to a halt. Property values have fallen by 40 percent to 60 percent since 2008. The price of the apartment, once about €1 million, had dropped to €400,000. But the buyer held off to see if it would fall even more, a reflection of deflationary psychology.
Not only did Mr. Potamianos lose a badly needed commission, but notaries and lawyers also lost business, as did renovators poised to refurbish the apartment. And the Greek government, he said, would not reap around €70,000 in taxes on the transaction.
Across town, Nikolas Varelas, the owner of Varelas Home Design, has cut prices on the decorative tiles, designer faucets and other home furnishings in his showroom by 45 percent to 60 percent. Even with that deep discounting, “sales are still low,” he said, “because people don’t have money.”
That is partly because wages have slumped. To avoid having to dismiss anyone, Mr. Varelas cut salaries by 40 percent. Ms. Tsirigotis, the hair salon owner, also lowered wages and cut her own salary by two-thirds before eventually having to lay people off.
Over all, average hourly labor costs in Greece fell last year to €13.60, from €17 in 2010.
Such declines theoretically have a silver lining, by making Greek products more competitive for export. In reality, though, manufacturers say any savings has largely been negated by a raft of new taxes, including a 23 percent value-added tax and a 20 percent tax on energy costs, levied by the government to fill its coffers.
“There has been such a high level of taxation on production that these increases have far outstripped any benefits made on the wage front,” said Evangelos Mytilineos, vice chairman of the Hellenic Federation of Enterprises and the president of Mytilineos Holdings, one of Europe’s largest aluminum producers.
Mr. Mytilineos says he is hoping that the European Central Bank will help. “We are going through extraordinary circumstances in the periphery of Europe,” he said. “The E.C.B. needs to act with extraordinary policies.”
