Since the global financial crisis of 2008, the U.S. and the U.K. have seen output grow more slowly than in previous recoveries. That's nothing to boast about. Still, six years on, gross domestic product is higher in both countries than it was at the pre-crisis peak. Europe's output remains 2.4 percent below that benchmark. And the gap isn't closing.
All three of the euro area's biggest economies -- Germany, France and Italy -- are failing. Germany's output actually fell in the second quarter. So did Italy's, for the second consecutive quarter. (Whether this is a new recession for Italy or a continuation of the old one is debatable.) The European Central Bank currently forecasts a rise in euro-area output of 1 percent this year. Expect that to be revised down next month.
With inflation in the euro area running at 0.4 percent -- way below the ECB's target of less than but close to 2 percent, and far too close to outright deflation -- why isn't the ECB trying harder to ease monetary policy? Its official answer is that it adopted new measures in June, including an expanded program of support for bank lending. These, it says, should be given time to work.
Patience is often a virtue in central banking, but not in this case. The ECB's measures in June were timid, and the risks are increasingly skewed toward deflation and further prolonged stagnation or worse. The euro area needs quantitative easing of the kind applied by the U.S. Federal Reserve and the Bank of England. The case for this has been strong for months; now it's overwhelming.
The ECB is nervous because outright QE faces political and legal obstacles. One way or another, those issues will have to be resolved -- and that's what ECB President Mario Draghi needs to start saying. Whatever it takes, Mr. Draghi.
Monetary easing, though, isn't enough. The euro area also needs to rethink its fiscal policy. France just did -- demanding that its deficit-reduction target for 2014, imposed by the European Union, be relaxed. This makes sense. In a stagnating or shrinking economy, fiscal austerity can be self-defeating: If it slows economic growth even more, a fiscal squeeze can add to the burden of public debt.
German policy makers have resisted proposals to loosen the euro area's agreed fiscal targets. The European Commission has echoed the same line, insisting that supply-side reforms are the key to recovery. This is short-sighted. Europe needs both demand-side and supply-side stimulus -- but the first is both more urgent and can be delivered more promptly.
Europe's economy is in a dangerous place. Its fiscal and monetary policies need to change, and there's no excuse for further delay.
--Editors: Clive Crook, Michael Newman.
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