Despite this week's interest rate cut, the European Central Bank chief is hamstrung by its narrow charter, writes Jack Ewing.
The European Central Bank cut its benchmark interest rate to a record low on Thursday. But its president, Mario Draghi, indicated that his promise last year to do "whatever it takes" to save the euro had limits.
For now, at least, the bank remains unwilling or unable to wield the more powerful weapons that many economists say are needed to jolt the Continent out of recession. Although the big fear last year that the eurozone might break apart has receded, the danger now could be prolonged stagnation like that which has plagued Japan for most of the past two decades.
Even the traditionally conservative Bank of Japan has become bolder lately, aggressively buying government bonds to try to double the supply of money in circulation and spur growth.
Such a step would be unthinkable for Draghi, who is hemmed in by the bank's narrower mandate and the historically rooted inflation fears of Germany, the eurozone's wealthiest and most politically powerful member.
The bank's governing council, meeting in Bratislava, reduced its benchmark interest rate to 0.5 per cent from 0.75 per cent. But that move was widely seen as mostly symbolic, to avoid the impression that the bank and Draghi were doing nothing as the eurozone recession threatens to engulf countries like Germany that have previously been spared.
The central bank also extended its promise to provide banks with as much cheap cash as they need through 2014, and said it was exploring ways to use the European Union's house bank to stimulate lending to small businesses.
Draghi also raised the possibility of imposing a "negative rate" on the deposits that banks routinely park at the central bank, essentially charging the banks to store their money. That might discourage lenders from hoarding cash rather than lending.
But it could have unintended consequences. For example, banks might store huge amounts of paper bills as a low-risk alternative to central bank vaults.
Draghi insisted that the rate cut, which takes effect on Wednesday, would stimulate growth, especially now that the economic slump that has afflicted Spain and Italy for more than a year is spreading to countries like Germany, Austria and Finland.
Anticipating scepticism, he urged reporters "not to underestimate the impact" of the rate cut and other measures at his news conference on Thursday. It was one of the central bank's twice-a-year meetings.
Not only is the central bank avoiding Japanese-style shock therapy, but it remains far from pursuing any equivalent of the so-called quantitative easing that the US Federal Reserve and the Bank of England have used to stimulate their economies.
"The bright minds in the eurotower are still working hard to come up with a new magic bullet," Carsten Brzeski, an economist at ING Bank, said in a note to clients, referring to the central bank's headquarters in Frankfurt, Germany.
"In the meantime, the only thing Draghi found in his tool kit was an old tool and a chill pill to keep markets happy in the waiting room."
Under the eurozone's political structure as a loose confederation, the ECB does not have the monolithic power of the US Fed, the Bank of England or the Bank of Japan. Even if Draghi and some others on the 23-member governing council wanted to do more to spur growth, they are hamstrung by a charter that obliges the bank to defend price stability above all else and forbids it from providing financing to governments.
Draghi has at times been willing to stretch that mandate. Last northern hemisphere summer he promised to buy government bonds in unlimited amounts to control borrowing costs. His expression of resolve has been enough to keep speculators at bay and tamp down the interest rates on Spanish and Italian debt, without any actual bond purchases.
Draghi also must contend with the politics of the central bank's governing council, which includes the heads of all 17 national central banks in the eurozone. Germany, in particular, remains staunchly opposed to bond buying or other aggressive measures to stimulate growth, for fear of inflation.
"There are 17 governors of 17 member states with completely opposing views," said Zsolt Darvas, a research fellow at Bruegel, a research organisation in Brussels.
"There are major disagreements." The need to promote consensus breeds caution, he said. Darvas also noted that the EU lacked a central treasury that would stand ready to provide financial backup if central bank investments went wrong, as the US Treasury implicitly backs the Fed.
"That probably makes the ECB more reluctant to take risks," he said.
Draghi promised on Thursday to continue letting banks borrow as much as they wanted at the benchmark rate for "as long as needed," and at least until mid-2014. That was a longer time commitment than the ECB has offered in the past.
In the latest sign of trouble in Europe's core, two stalwarts of corporate Germany, BMW and Siemens, warned on Thursday of lower profits for this year because of the weakness in European markets.