Editorial Board

Draghi Dithers as Europe Deflates

Why isn't the European Central Bank doing more to stave off deflation?
Not doing enough.

European Central Bank President Mario Draghi had nothing new to say at his news conference yesterday, which is a pity. Mainly, he confirmed measures previously announced to stimulate Europe's flatlining economy -- steps that looked too timid even before the latest dire news on euro-area inflation.

Inflation in the euro area has fallen yet again and now stands at 0.3 percent. Prices are already falling in several of the European Union's weaker economies. Even so-called core inflation, which excludes temporary factors and reveals the underlying trend, stands at less than 1 percent, a full percentage point below the ECB's target.

This steady drift to deflation entrenches Europe's financial problems by clobbering investors' confidence, such as it is, and adding to the burden of debt. It's an alarming situation and calls for a proportionately dramatic response.

With short-term interest rates at zero, what would that entail? The answer is outright quantitative easing, of the sort deployed by the U.S. Federal Reserve, the Bank of England and the Bank of Japan. The ECB should buy government bonds in impressively large numbers and aggressively expand its balance sheet (and hence the money supply).

Granted, there are legal complications with such an approach in Europe. But Draghi himself has said more than once that they are not insurmountable and that Fed-style QE remains an option.

If that's true, there's no reason not to deploy it at once.


Instead, the ECB has announced a program to buy private asset-backed and covered bonds -- QE-lite, if you will. Doubts remain over whether the market in these instruments is big enough to allow purchases on the required scale. Pressed yesterday to say how much of an expansion in the ECB's balance sheet he intended, Draghi wouldn't be drawn into a discussion. There's no balance-sheet target, he said. There's no target for the value of the euro, either. Not for the first time, the stimulus he provides with one announcement he undercuts with subsequent hedges and clarifications.

Yes, previously announced measures will help as they're rolled out this year. Investors are sure, at least, that interest rates in Europe aren't about to rise, and that if policy makers have surprises up their sleeves, these will take the form of fresh monetary stimulus rather than restraint. Those beliefs, together with the view that the clock is running down on rock-bottom U.S. interest rates, have helped to push the euro lower against the dollar and other currencies -- and that helps, too, by making EU exporters more competitive in international trade.

Nonetheless, the ECB could and should be doing more. With each passing month, its delay becomes more dangerous -- because if deflation gets entrenched, even full-scale QE might be insufficient to cure it.