Since Mario Draghi became president of the European Central Bank in late-2011, at the height of the euro zone crisis, he has used almost every one of his monthly press conferences to plead for help from the region's governments. He urged them to make their economies and labour markets more competitive, rein in profligate spending and fix their countries' banks.
The message: I am a central banker, not an alchemist. There is only so much I can do.
Mr. Draghi did so again on Thursday, when he announced an aggressive, new stimulus program to try to overcome the failings of the previous programs. "Reform efforts need to be stepped up in the majority of euro area countries," he said. "All countries should strive for a more growth-friendly composition of fiscal policies."
His comments, which came exactly a year after the start of the ECB's quantitative easing program, were not just throwaway lines. QE had been spending €60-billion ($89.5-billion) a month on bond purchases in an effort to boost inflation and stimulate growth. On its own, it hasn't worked, or at least hasn't lived up to expectations.
The inflation rate in the 19 European Union countries that use the euro was last recorded, in February, at minus-0.2 per cent, nowhere near the 2-per-cent target rate. In February, 2015, just before QE was launched into the great unknown, the figure was minus-0.3 per cent. So no improvement there – it's still negative.
How about the euro itself? The ECB's job description does not include fiddling with exchange rates, but nothing puts a smile of Mr. Draghi's face like a falling euro. A weak currency stimulates both exports and inflation. On Thursday, the euro was trading at $1.09 (U.S.) just before the ECB announcement (it later climbed 1.25 per cent). A year ago, it was at $1.08. Again, no improvement.
Growth and unemployment? No bad news here, although nothing to trigger a toga party. The rise in euro zone gross domestic product in 2015 was 1.4 per cent. The ECB expects identical growth this year. The unemployment figures are somewhat improved, but not by much: A year ago, the jobless rate was 11.2 per cent; in January, it was 10.3 per cent – still way too high and an embarrassment compared with plummeting unemployment figures in the United States.
While the ECB's new stimulus program was more aggressive than expected, it signalled that the ECB battleship is running out of ammunition. At the regular policy meeting, it dropped all three of its main interest rates to record lows. The deposit rate dropped another notch into negative territory – it went to minus-0.4 per cent from minus-0.3 per cent – in a potentially misguided effort to encourage banks to lend out money instead of hoard it.
The ECB also raised the QE's monthly spending allowance to €80-billion from €60-billion, and added investment grade non-bank bonds to the list. The ECB also announced a new series of long-term refinancing operations that will pump more liquidity into the financial system.
The new measures may not work. Seemingly endless years of QE have failed to jolt the Japanese economy back to life. Now Japan is experimenting with negative interest rates. QE seems to have worked somewhat in the United States, but there is debate about whether it was necessary. The Americans, unlike the Europeans, forced their banks into quick and aggressive recapitalization programs. It worked and the U.S. banks became instruments of economic recovery. The European banks are still a mess and are less willing to pump loans into the economy. They are instruments of economic non-recovery.
If the latest ECB measures don't work, helicopter cash – dropping bundles of new money directly into the economy, perhaps through one-off credits to everyone in the euro zone with a bank account – may be next. Or governments will have to get in the game, as poor Mr. Draghi has been urging for almost five years.
There was a time when central banks in general and the ECB in particular were merely central banks – that is, they existed largely to protect the banking system and prevent economy-wrecking bank runs.
The 2008 financial crisis turned the ECB and other central banks into firefighters. They pumped massive amounts of liquidity in the financial system and became the lenders of last resort for clapped-out governments. In 2012, when Greece was on the verge of bolting from the euro zone, Mr. Draghi promised to do "whatever it takes" to keep the hapless union intact. He did, partly through the launch of a program that would see the ECB buy the sovereign bonds of any country that was in danger of losing access to the debt markets. The program drove down sovereign bond yields from crisis-level highs to record lows.
Now the ECB is expected to boost demand and inflation, becoming the policy-makers of last resort, taking the burden off prime ministers, presidents and finance ministers. "The euro zone crisis is a sadly good example where the ECB's willingness to improvise policies to support growth has shielded the embarrassingly inept fiscal policies," economics professor Refet Gurkaynak, of Ankara's Bilkent University, said in a February note published on the VoxEU.org site.
He and other economists note that, historically, central banks have been adept at slowing economic activity to bring down inflation and interest rates, but not adept at the opposite. With interest rates near zero, or even negative, over large swathes of the planet, the central banks have almost no monetary power left to stimulate growth and inflation. The ECB is backed farther into the corner than most central banks.
Any government leaders with a pulse will realize that Mr. Draghi is almost out of ammunition. They will realize that the ECB alone cannot fix the banks, free up rigid labour markets, build infrastructure that makes economies more competitive, and boost income and training for the unemployed and underemployed. The ECB has prevented disaster in the euro zone. It can no longer be expected to perform economic miracles.