The president of the European Central Bank, Mario Draghi, last week insisted that the eurozone is not in danger of deflation (which can de described as a widespread fall in prices coupled with the expectation of further decreases), in spite of the fact that it is experiencing a fairly long period of low inflation.

As proof of this, he cited that the ECB does not have any evidence of consumers postponing their expenditure. Such a postponement is characteristic of deflation as consumers would be expecting a further fall in prices and would hope to buy cheaper products in the future. In fact, conversely, when consumers expect an increase in prices, they bring forward their expenditure to save money in the future.

Analysts had started talking of a possible deflationary spiral in the eurozone economy as current inflation is 0.8 per cent while the target for price stability in the eurozone is two per cent. However, the inflation rate is not the same in all countries and is not affecting all products. This is why from a theoretical perspective one cannot speak of deflation.

On the other hand, there needs to be a better understanding as to why we are experiencing such a prolonged period of low inflation and why, in spite of low inflation, the economic recovery remains fragile. So since it is accepted that this is not deflation, then what is it?

I will focus on two reasons that could explain why the situation appears confusing. First, with an inflation rate at below one per cent, one would expect to have a consumption boom. Yet this is not happening. In fact, in certain countries of the eurozone, consumption is still on a downward path. This is not happening because consumers expect prices to go down further. Rather, this is probably happening because of the current high levels of unemployment (with a consequential drop in purchasing power) and with the expectation that it could go even higher.

There needs to be a better understanding as to why we are experiencing such a prolonged period of low inflation and why, in spite of low inflation, the economic recovery remains fragile

The unemployment situation among young people is even more dramatic and there are no visible signs of it improving in the short term. Again, the unemployment situation is not the same in each country that uses the euro as its currency and even in regions within one country. Thus it is not easy to develop a common expansionary policy that would seek to stimulate employment (similar to those proposed by British economist John Maynard Keynes several decades ago). This would explain why the period of low inflation is expected to protract itself for some more time.

Secondly, such a low inflation rate should be encouraging banks to lend more and investors to borrow more. Businesses across the eurozone are complaining that they wish to invest more but banks are not willing to lend more money. This is because several banks still need to address certain issues in their balance sheet. Add to this the fact that risk appetite in the banking sector has shrunk and that banks can still earn a decent rate of interest if they purchase sovereign bonds, and one starts to get a better understanding of the situation.

The ECB has already given signals that it is willing to consider to apply a negative interest rate on deposits held with it, in an effort to encourage more bank lending. I believe this policy needs to be implemented sooner rather than later to provide businesses (especially small- and medium-sized enterprises) access to credit lines.

There is a similar situation with regard to house loans (which should be considered to be different from loans to building developers). In several countries, the level of deposit that is being asked for by banks to secure a house loan has increased. The end result is that a low inflation rate should have brought banks closer to the real economy but, in effect, banks have veered more determinedly towards the institutional financial market.

I have already commented in the past that policymakers seem at a loss as to how to address the economic and financial crisis, which is entering its seventh year with little to no respite.

Last week I spoke about who is paying for this crisis as it has become evident that the people paying for it are not the people that have caused it.

Political leaders in the eurozone need to have more clarity as regards to what brought us to the current situation and apply more flexibility to their policies to emerge from what is a confusing situation that is causing great pain to certain segments of society.