Seeing the signs.

ECB May Be Forced to Do More With Less

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The European Central Bank has good reasons to sit tight at its monthly meeting tomorrow. And, most likely, that's what most members of its governing council would do if left to their own devices.

But they live in an imperfect world that is getting less accommodating by the day. Thus, they may well be forced into carrying out additional stimulus measures, even though such action is unlikely to materially improve the region's prospects for growth and jobs.

If the ECB needed any reminders about Europe's economic predicament, it got another one yesterday from the European Commission. Officials again reduced their growth projections for 2014 and 2015. And the renewed loss of optimism is due primarily to the challenges faced by the big three -- France, Germany and Italy -- as opposed to the small peripheral economies.

Europe's worries are compounded by "lowflation" -- an inflation rate that is just too low to help growth and jobs. Unfortunately, the ECB's instruments, on their own, are ill equipped to deal with what holds back growth -- be it poor competitiveness, inadequate aggregate demand or residual pockets of excessive indebtedness.

Then there is the issue of moral hazard. Its 2012 success in overcoming the regional debt crisis, as well as its repeated willingness to buy more time for politicians to get their act together, has ended up by relieving them from the intense pressure to act.

The most the ECB can do is possibly buy some more time by weakening the currency and somewhat improving credit flow. Yet the central bank could well end up by doing more tomorrow anyway.

With slowing growth in both Japan and the emerging world offsetting the healing U.S. economy, external markets aren't much of an engine of expansion and employment for Europe. This is aggravated by the strong tendency of the Bank of Japan to weaken the yen against all currencies, including the euro -- adding to the pressures that European companies in general (and German ones in particular) face in competing internationally.

In a less imperfect world, the ECB would refrain from any additional actions, waiting for governments to do their part. But it is hard for central bankers to stay on the sidelines and watch Europe's considerable economic challenges grow even worse. So if they seek more stimulus measures tomorrow, it might be ineffective in breaking Europe out of its malaise, but it shouldn't come as a surprise.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at

To contact the editor on this story:
Katy Roberts at