You can't say Mario Draghi isn't doing his part. The European Central Bank President once again fulfilled the pleas of European politicians Thursday with another round of rate cuts and the promise of more monetary easing to come. Too bad the politicians keep using Mr. Draghi as an excuse to dodge their responsibility to pass pro-growth reforms.
Thus we are getting another round of the Draghi Default, in which monetary policy is supposed to do all the heavy growth lifting for Europe. The central banker obliged by cutting the main lending rate to 0.05% from 0.15%, even though he had said in June the central bank was already at "the zero bound." The ECB also increased the so-called negative deposit rate, or the rate banks will pay for holding deposits at the central bank, to minus-0.2% from minus-0.1%, in a bid to force more bank lending.
Mr. Draghi's larger goal is to keep talking down the euro exchange rate against the dollar in a bid to lift inflation in Europe closer to the ECB's 2% target. With inflation at 0.3% year over year in August, and the U.S. dollar getting stronger on the hope of faster U.S. growth, you can at least make a case for easing on monetary grounds within the ECB's mandate to maintain stable prices. Mr. Draghi had already talked down the euro to 1.315 from 1.40 to the dollar since May, and on Thursday it fell again to 1.295 after Mr. Draghi's announcement.
Yet further reductions in interest rates, even into negative territory, aren't enough to assuage euro-zone politicians. So in his press conference Thursday Mr. Draghi also announced a version of quantitative-easing lite. For political and legal reasons, expanded buying of government debt a la Washington, London and Tokyo is more difficult for the ECB. Mr. Draghi says he'll instead buy covered bonds and so-called asset-backed securities, or ABS, which are bundles of corporate and household loans.
European Central Bank President Mario Draghi.Bloomberg News
Unlike U.S. credit markets, only some €300 billion ($390 billion) of ABS are outstanding in Europe at the moment. Mr. Draghi has been trying to expand such a market with the new cheap, medium-term lending program he announced in June, and perhaps the central bank's cash can stimulate a wider and deeper credit market.
The problem comes from believing that QE is some magic growth elixir. The world's Keynesians have convinced themselves that the U.S. is now growing faster than Europe simply because the Federal Reserve implemented QE while Europe hasn't. That overestimates QE's impact on U.S. growth, which has hardly been gangbusters at a mere 2% average annual rate. But it also underestimates the degree to which European economies are burdened by aging populations, high taxes, regulations on business, and constricted labor markets.
Mr. Draghi understands this, which is why he keeps repeating as he did Thursday that Europe needs "ambitious and important" reforms "first and foremost" to return to growth. Yet those reforms never arrive, and now the politicians have another excuse to delay as they wait for an ABS program to start next year. This has already happened once on Mr. Draghi's watch, when his promise of unlimited sovereign bond purchases in 2012 pushed government bond yields so low so fast that it eased credit-market pressure on governments to reform.
The other danger is that Europe will interpret the ECB's opening for more fiscal policy stimulus as an excuse for more government spending. Mr. Draghi has hinted at easing the EU's deficit limits. This would make sense if politicians followed through with pro-growth tax cuts as Spain has. But another burst of government spending won't spur growth and would only set the euro zone up for more tax-raising austerity later.
Europe's main economic problem is a political class that doesn't want to address the structural impediments to growth that have nothing to do with monetary policy. Mr. Draghi is being asked to perform miracles he can't deliver.