Via the always invaluable Mark Thoma, the IMF blog — yes, the IMF has in effect become an econblogger — has a terrific piece on the problem with low inflation in Europe. It’s the perfect antidote to the do-nothing voices insisting that there’s no problem, because we don’t see actual deflation yet.

Part of the IMF analysis concerns debt dynamics. They don’t put it quite this way, but I’d say that to have debt deflation — in which falling prices due to a weak economy increase the real burden of debt, which depresses the economy further, and so on — you don’t need to have literal deflation. The process begins as soon as you have lower inflation than expected when interest rates were set. It’s also noteworthy that inflation rates in the highly indebted countries are all well below the eurozone average (pdf), with actual deflation in Greece and near-deflation in the rest. So the debt deflation spiral is in fact well underway.

Beyond that, the trouble with low inflation is that it exacerbates the problem posed by the two zeroes — the impossibility of cutting interest rates below zero and the great difficulty of cutting nominal wages.

Is ECB policy constrained by the zero lower bound? You could argue that it isn’t, since it could cut a bit further than it has but hasn’t. I’d argue, however, that if nominal interest rates were much higher — say, 4 percent — but the overall euro macro situation were what it is, with inflation clearly below target and unemployment very high, the ECB wouldn’t (and certainly shouldn’t) hesitate at all about cutting rates substantially. It’s only the fact that zero is already so close that makes cutting rates seem like a big deal, an admission that things are looking dangerous (which they are).

Meanwhile, the zero on wages is hugely important now. The fundamental issue here is that Spain (and other debtors) needs to reduce its wages relative to Germany, reversing the runup in relative wages during the bubble years. The argument some of us have been making for a long time is that it’s vastly easier if this adjustment takes place via rising German wages rather than falling Spanish wages — partly because of the debt dynamics, but also and crucially because it’s very hard to cut nominal wages.

What would you look for if downward nominal wage rigidity were a seriously binding constraint? A spike in the distribution of actual wage changes at zero. And sure enough:

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To be technical about it: Yowza. This is prima facie evidence that excessively low European inflation is already a huge problem.

The point is that there is no red line at zero inflation; excessively low inflation is still a very severe problem, especially given the European situation, even if the number is positive.

So when people warn about Europe’s potential Japanification, they’re way behind the curve. Europe is already experiencing all the woes one associates with deflation, even though it’s only low inflation so far; and the human and social costs are, of course, far worse than Japan ever experienced.

This need not lead to a breakup of the euro: Pessimists on that front, me very much included, misjudged the strength of European elites’ commitment to the project. But the euro might yet survive — and be a continuing disaster.