Mario Draghi made a bunch of new announcements today, and investors were initially impressed: European Union stocks went up, and the euro dropped almost 2 percent. Their glow wore off, however, once they realized that the president of the European Central Bank had failed to announce the one policy that would make a real difference to Europe's economy.
Outright, Federal Reserve-style quantitative easing -- the most powerful weapon the central bank could use to fight deflation -- is still, at best, a remote prospect, according to the ECB's announcement. Yet the euro area needs QE now, because the risk of deflation hasn't gone away.
The ECB certainly can’t be faulted for the sheer variety of its new measures. The main headline-grabber: It cut the interest rate paid to banks on deposits at the ECB from zero to minus 0.1 percent (meaning that banks will be charged for those balances). It cut its main policy rate from 0.25 percent to 0.15 percent. It refreshed an existing refinancing program to encourage bank lending to companies and households. And it said it would "intensify preparatory work" related to purchases of asset-backed securities.
Granted, the move to a negative interest rate on deposits is historic, as no other big central bank has done this. The cut is so small, however, that its effects are likely to be imperceptible once the drama of the initial announcement has faded. Same goes for the cut in the main policy rate -- except in that case the announcement effect was minimal to begin with. The new refinancing operation is worth a try, but it's small.
The announcement on asset-backed securities was potentially the most valuable -- but, as always with the ECB, the key word is "potentially." The idea here isn't to embark on Fed-style QE: The European ABS market is too small for that, even if the ECB intended to hold the securities on its balance sheet, which it doesn't. Rather, the idea is to encourage banks to lend to the euro area's small and medium-size companies, which are still feeling a severe credit squeeze. By supporting a larger market in asset-backed securities, the ECB can make loans to such borrowers more attractive for banks, thus expanding credit.
To be sure, it's a good idea -- but it isn't new, and a promise to "intensify preparatory work" doesn’t exactly convey a sense of urgency. At any rate, the preparations aren't that easy: They require input from other regulators, to ensure that the securities in question would be simple and transparent, rather than becoming a cloak for reckless lending. Draghi said today that the ECB would work with "other relevant institutions" to this effect. Translation: This will take awhile.
Meanwhile, as the euro area flirts with deflation, the ECB continues to revise its inflation forecasts downward. Prices rose just 0.5 percent in the year to May -- less than expected. The central bank's new forecast shows inflation of 0.7 percent this year, 1.1 percent in 2015 and 1.4 percent in 2016. Two years from now, according to these projections, inflation will still be far below the central bank's benchmark of 2 percent.
This isn't good enough. The ECB's new measures, cleverly packaged as they were, fall short of what's required. Before these announcements were made, Europe needed stronger monetary stimulus. It still does.
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