Mario Draghi deserves credit for what he did last week. The European Central Bank’s president found a way to surprise investors with lower interest rates and announced a plan that looks a lot like quantitative easing — both good moves. Nonetheless, the ECB is still falling short. It’s supplying too little monetary stimulus, and it’s compounding that error by advertising its own impotence. These failures, by the way, aren’t Draghi’s fault. They’re baked into the ECB’s design.
Is it so certain that the euro area needs more monetary stimulus? Yes, if you assume that euro-area fiscal policy can’t take up the slack — and that’s where things stand. The ECB’s target for inflation is “close to, but below, 2 percent.” Actual inflation is now 0.3 percent. That’s below 2 percent but it sure isn’t close. The ECB’s forecasts show inflation running well below 2 percent for the next two years. The prediction for 2016 is 1.4 percent. That still isn’t close.
So the only question is whether the ECB’s new measures, added to the minor changes it announced in June, go far enough. Taken at face value, the new interest-rate cuts are trivial. The ECB cut its benchmark lending rate from 0.15 percent to 0.05 percent, and it’s made the rate on deposits held at the central bank a bit more negative — cutting it from minus 0.1 percent to minus 0.2 percent. The direct effects will be negligible.