euro_3157661bThe eurozone has let it happen. Europe’s authorities have so mismanaged monetary and fiscal strategy that the whole currency bloc has tipped into deflation. The drop in the eurozone’s headline price index to -0.2pc in December scarcely captures the significance of what is happening. Deflationary forces have been gaining a grip on all the crisis states of the South for 18 months. A chorus of economists began warning two years ago that the region was sailing close to the wind by letting inflation drift ever lower, leaving itself one shock away from a loss of policy traction. That shock is now hitting in successive waves: the Russia crisis; China’s over-investment glut; and now the collapse of oil prices. Textbook theory suggests that a halving of energy costs should be cause for celebration, a tax cut for consumers. It is very different calculus when inflation is already zero, bond yields are plummeting to 14th century lows across the world, and market psychology is becoming “unhinged” – to use central banking vernacular. More