Time running out for the ECB

Germany is Europe's largest economy, and accounts for almost one third of the euro zone's gross domestic product. In the second quarter to June, its economy contracted, while that of France stagnated, and Italy's economy returned to recession – for the third time in six years. These three economies account for some two thirds of a weakening euro zone, which managed zero growth in the latest quarter.

The contrast in performance between the currency bloc and the world’s other major economies is striking: in the US and the UK growth has been far stronger, unemployment is lower and inflation remains under control. Given that varied background, the Irish economy has performed remarkably well. And it may yet be the fastest growing economy in the euro area in 2014.

This year many commentators expect growth to exceed 3 per cent, where strong demand in the US and the UK has helped to boost exports. However, clear signs of a slowdown in Europe threaten to slow down the pace of Ireland's economic recovery, and are a concern. The European Central Bank's forecast of 1 per cent growth for the currency area is unlikely to be achieved, and the bank is under pressure to provide a further stimulus to boost growth - something it has been reluctant to do. Europe, clearly, isn't working. And, as yet, there is no broad political agreement on what is needed.

ECB president Mario Draghi acknowledges the weak state of the euro zone economy. However, he has also indicated the central bank would not act unless some governments – notably France and Italy – agree to undertake structural reforms in their sluggish economies. These reforms are necessary and long overdue. However, unpopular governments presiding over weak economies do find structural changes, politically difficult to introduce.

In June, the ECB provided some monetary stimulus, by cutting borrowing costs further, and by imposing negative interest rates on euro zone banks that place deposits with it, as a way of forcing them to lend more. Mr Draghi then said the ECB governing council was also ready to use all unconventional measures to meet its mandate. The bank’s mandate requires it not only to concern itself with price stability, but also to support the “general economic interests of the Union”. Inflation in the euro zone has fallen sharply – to 0.4 per cent – far below the 2 per cent target rate set by the ECB. Deflation is now a greater threat than inflation.

Clearly, “the general economic interests of the Union” are best served by attempting what has not been tried – but has already worked in the US and the UK – a programme of quantitative easing. The ECB would buy government bonds to help revive the economy, lower the value of the euro and check deflation. Time is not on the side of the ECB.