SHORT of embracing quantitative easing, the European Central Bank has now done everything it can to try to loosen conditions in the Eurozone. But by no stretch of the imagination could yesterday’s actions be deemed radical. If the aim was to prevent the decline of Eurozone inflation, now down to 0.5 per cent, and to boost it back up to two per cent, the ECB’s target, then yesterday’s measures won’t have done the trick. Some will turn out to be useless: Scandinavian countries that pioneered negative interest rates for commercial deposits at central banks found that they had no impact on lending.

No wonder, therefore, that so many people are worried that the Eurozone could be about to tip into a deflationary spiral and that (almost) everybody is clamouring for more action. It may be, for once, that the consensus is right and the ECB should immediately engage in a major bout of QE. But I remain undecided and not merely out of contrarianism.

First, there is no doubt that monetary trends have been too weak in the past, and that the ECB should have acted far sooner to counter that. The great lesson of the 1930s is that central banks must not allow the money supply and in turn nominal GDP to collapse.

But the fact that the ECB was too hawkish in the past doesn’t automatically mean that it is being too hawkish today. The lags between monetary action and any impact on inflation are long and variable; yesterday’s moves could take 18 months or longer to show up in prices. Today’s disinflation is largely the product of decisions in 2012.

But the world has moved on since then, and the overall continent is no longer on the verge of another depression, for all of Italy, Holland or Portugal’s problems. Growth is generally improving and while aggregate monetary trends aren’t especially great they aren’t disastrous either.

Simon Ward, chief economist at Henderson, has crunched the monetary data. He finds that six-month growth of Eurozone real narrow money fell in April but remains within its range over the past year. It is, he says, at a respectable level by historical standards, and suggests that Eurozone GDP will continue to grow moderately.

Some countries are doing reasonably well; some are still doing poorly. So a question needs answering. In which countries is monetary policy to blame, and in which are supply-side factors – such as excessively high taxes and crippling regulation – the real problem?

I don’t believe for a minute that the ECB’s 0.1 per cent cut to some of its interest rates will turn France from socialist basket-case to booming miracle economy, for example.

Charging banks very slightly for their reserves at the ECB is hardly going to kick-start the Italian economy either, which has underperformed disastrously for the past 15 years and remains sclerotic in the extreme. In these and many other – but not all – Eurozone countries, the economy is primarily suffering from a “real”, rather than a “monetary”, deficiency.

The problem with the Eurozone, of course, is that it isn’t a proper, integrated economy. It remains a collection of very different countries and regions which, in many cases, have actually further diverged since they started to share a common currency. So average money supply growth rates are a pretty useless indicator – what matters is the national breakdown. On that metric, the periphery countries are lagging again in monetary growth compared to the centre, according to Ward; the sluggish monetary growth won’t be enough to tip them back into recession but it may indicate that economies won’t accelerate sufficiently to dent sky-high levels of unemployment.

It may well be that QE is a partial answer to the Eurozone’s woes, or at least to those of its weaker component nations – but not only is that case actually far from proven, it is clear that the continent needs much more than just looser money if it is ever to bounce back.

allister.heath@cityam.com

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