By The New York Times?s Editorial Board
Some analysts and public officials say the beleaguered euro zone is finally on the road to recovery. Unemployment has decreased slightly, though it remains high at 12 percent, and the euro zone as a whole grew by 0.3 percent in the last quarter of 2013.
But theirs is an overly optimistic view. Recent data show that the economies of many European countries remain very weak, and the euro zone as a whole could soon experience deflation, a decline in the general level of prices, if government officials and central bankers do not take steps to bolster the economy. Last month, inflation in the 18 countries that use the euro was just 0.7 percent, down from 0.8 percent in December. That is far below the European Central Bank?s target for an inflation rate of just under 2 percent.
Deflation is a pernicious and self-reinforcing phenomenon that debilitates economies, as Japan experienced for much of the past 15 years. When prices fall broadly, consumers put off purchases and businesses see little value in investing for the future, creating a downward spiral. Deflation also makes it more difficult for governments and other borrowers to repay their debts.
Earlier this month, the central bank?s president, Mario Draghi, dismissed the fear of deflation, but his words were hardly reassuring. ?There is certainly going to be subdued inflation, low inflation for an extended, protracted period of time, but no deflation,? he said. If the bank believes that prices will increase so slowly, the right thing to do is to lower interest rates and pump more money into the economy through bond purchases. Yet it announced no new policies at its February meeting.
The central bank?s inaction is particularly disconcerting because it is the only public institution that could provide a boost to the weak euro-zone economy. Under pressure from Germany, governments across the euro zone have committed to cutting spending and raising taxes in a counterproductive effort to reduce their fiscal deficits.
European officials have also delayed and watered down plans to create a euro-zone banking union, which is needed to recapitalize or shut down troubled financial institutions that have become a burden on strained economies like Greece, Ireland, Spain and Portugal.
There is another problem. Thousands of Germans have joined in a lawsuit to challenge the central bank?s authority to buy bonds issued by European governments under a program Mr. Draghi announced in 2012 but has never used. The Federal Constitutional Court in Germany recently ruled that the central bank cannot legally buy government bonds, but it did not block such purchases. Instead, it sent the case to the European Court of Justice. Central bank officials say it can buy bonds while that case is pending, but it might be less inclined to do so given the legal uncertainty.
Ideally, the central bank and European governments would work together to revive the economy of the euro zone. But since that is unlikely, it is up to the central bank to act when it meets again next month.
A version of this editorial appears in print on February 18, 2014, on page A22 of the New York edition with the headline: Europe Flirts With Deflation