Has the ECB reached the end of its rope?

Now, with mounting evidence of impending recession, the ECB is caught in political and technical traps. Bundesbank president and ECB Governing Council member Jens Weidmann has continued to oppose monetary stimulus. In late January, he called for monetary policy “normalization” by selling assets purchased under QE and “phasing out ultra-low interest rates.” On February 27, the same day as the Fed’s Powell repeated his call for patience in raising rates, the Bundesbank’s annual report warned that waiting to raise rates created “risks” and adverse “side effects.”

Held back by such opposition to more stimulus, the ECB has continued to offer its customary cheap talk. Yes, all policymakers rely on cheap talk. But stymied in its actions, the ECB relies particularly heavily on its words. Asked after the January monetary policy meeting how the ECB intends to fight recessionary and deflationary tendencies, ECB president Mario Draghi’s gave his standard response. Domestic economic and, especially, financial conditions, he said, remain “very favorable.” In any case, “We have lots of instruments and we stand ready to adjust them or use them.” Draghi has used these same words since November 2013, when the eurozone began to slip into deflationary psychology. This pattern of repeated denials, delays, and half-measures is the antithesis of risk management.

And because the eventual scale of actions do not match the words, the ECB has steadily lost credibility. Predictions of an imminent rise in inflation have proven false repeatedly. Italy and France are stuck in lowflation despite modest economic recovery in 2017. Businesses and households in these two countries act on the belief that inflation will not rise anytime soon, which causes them to postpone purchases, which keeps inflation low. Spanish inflation, after a brief spurt in 2016 and 2017, is sliding into lowflation territory. The ECB provides little discernible stimulus to economic growth: the timing of eurozone growth coincides with global trade growth, not with ECB monetary policy.

Having frittered away its firepower, the ECB can now do little. Restarting QE will face extraordinary political obstacles. After all, as Draghi underscored, the ECB has already purchased 25 percent of eligible eurozone government bonds. Northern countries are not anxious to buy more bonds of countries that may eventually not repay their debts.

With little choice at the Governing Council’s March 7 meeting, Draghi announced that the ECB would extend cheap liquidity to banks through its much-touted targeted long-term refinancing operations (TLTROs). In past iterations, the weakest Italian and Spanish banks have gobbled up large chunks of such liquidity. Under new regulatory requirements, these banks will require larger liquidity buffers, which will likely prove too costly to build from market sources.

Thus, in effect, the ECB will continue to subsidize banks’ lending. Not surprisingly, French central bank chief François Villeroy de Galhau and his Finnish counterpart Olli Rehn are worried. Subsidizing the lending of Italian and Spanish banks, they recently emphasized, is not monetary policy. The subsidies prop up the weak banks and their zombie borrowers. Weidmann is right that prolonged “ultra-accommodative” monetary policy can have troubling “risks and side effects.”

Moreover, TLTROs are an odd tool to deploy with the economy slowing down and banks, especially in Italy and Spain, anticipating reduced credit demand. This is especially so since the TLTROs will kick in only later this year, by when the recession will likely be deeper and the credit demand even less.

The ECB has also promised it will not raise its policy interest rates until the end of the year. That is an empty promise. Financial markets know that the ECB dare not raise interest rates in any foreseeable future.

For the rest, the Governing Council is still not persuaded that the downturn could “persist.” Members believe that the eurozone economy will hum again later in the year because Chinese growth will pick up, trade disputes will fade, and Germany’s auto industry will surely rev up again.