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European Central Bank (ECB) President Mario Draghi attends the monthly ECB news conference in Frankfurt January 9, 2014.

Ralph Orlowski/Reuters

It looks as if European Central Bank boss Mario Draghi – Super Mario to his fans – is about to leap to the rescue again. In 2012, his pledge to hoover up the clapped-out bonds of any euro zone country that was having trouble financing itself probably spared the region from shattering into 18 sovereign pieces. Deflation is the new threat. The ECB has announced it will use everything in its arsenal to fight it.

Mr. Draghi's whack-a-mole strategy has worked well. The question is whether it has worked too well. His 2012 pledge sent bond yields plummeting. They plummeted again two weeks ago, when the EBC's deflation-fighting commitment was made.

No good deed goes unpunished. The incentive for governments to make reforms can only move inversely with bond yields. The pressure to make economies more competitive, boost their paltry growth rates and bring down near-record unemployment is falling away. The euro zone may be intact, and the ECB may prevent disinflation from turning into outright deflation, but the cost may be years of sluggish performance.

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In the spring of 2012, the euro zone was in serious trouble. Three countries – Greece, Ireland and Portugal – had been bailed out and Spain was negotiating a €100-billion ($152-billion) bank rescue, effectively a backdoor sovereign bailout. In Greece, the radical left anti-austerity Syriza party seemed on the verge of winning the June election, triggering a bank run that threatened to cripple its banking system (Syriza lost, but is ahead in the polls again). Italy, the euro zone's third-largest economy, was on the verge of losing its ability to finance itself.

Mr. Draghi had no intention of presiding over the destruction of the euro zone and swung into action. In London in July, 2012, he said he would do "whatever it takes" to preserve the euro. In came the program, known as outright monetary transactions, that would see the ECB buy unlimited amounts of the bonds of countries in financial distress. The program has never been used but its mere presence reversed the rise of bond yields in the crisis countries.

Goodbye, debt crisis; hello, deflation crisis.

There is a certain point when falling inflation rates turn from good news to bad news. That point comes when companies and consumers delay purchases and investments on the belief that prices will fall, so why spend today? Ultra low inflation rates and deflation can also be murder on any government's effort to bring down its debt to gross domestic product ratio. Governments typically like to inflate their debts away. Real interest rates rise as inflation rates fall.

Inflation in Europe has been in decline since late 2011, thanks to gruesome unemployment, excess manufacturing capacity, the weak recovery, falling energy prices and the rising euro. At last count, it was running at 0.5 per cent, well below the ECB's target rate of slightly under 2 per cent. The question is whether 0.5 per cent is the bottom or close to it. The International Monetary Fund says that Greece alone will post a slightly negative inflation rate in 2014 and most economists forecast inflation at 0.9 per cent to 1.5 per cent for the euro zone his year, rising marginally next year.

The figures don't suggest deflation is coming. Yet the ECB in its last governing council meeting signalled it was ready to haul out the heavy artillery. Besides another interest rate cut, the options include quantitative easing, in which the ECB would make large-scale purchase of government and private debt (more likely the former) to boost money supply, or charge banks a fee to park their funds at the ECB.

As soon as Mr. Draghi said the ECB was ready to launch son of "whatever it takes," bond yields fell in the expectation that the ECB is about to buy every bond in sight. In the past month, the yields of Portugal's 10-year dropped 0.7 of a percentage point, to 3.7 per cent, which is only one point higher than U.S. Treasury yields. Remember, this was a country on the verge of bankruptcy not long ago. Italy's yields have slumped to 3.1 per cent. They were double that level, or higher, two or three years ago. Greece's yields fell so far so fast – they're now below 6 per cent – that the country considered the prime candidate to bolt from the euro zone in 2012 is back in the debt markets. Last week, it couldn't keep up with demand for its new five-year bonds.

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All good news, right? For politicians, it sure is. They can say that the crisis is genuinely over – the bond yields say as much. That means they can ease up on austerity, which was always a vote killer, and dilute or drop unpopular reforms such as changing labour laws to make it easier to hire and fire, busting open closed professions and privatizing bloated government-controlled corporations. With bond yields so low, and the sense of panic over, the weakest euro zone economies are bound to wallow in their economic mud vats for longer.

Mr. Draghi had to do what he did in 2012 to keep the euro zone intact. Launching quantitative easing, however, could backfire. Even though the easing hasn't started, the mere mention of its possibility is encouraging lax and feckless reform behaviour.

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