Draghi holds course in face of deflation threat

Fri Mar 14, 2014 8:02am EDT
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By Paul Carrel and Leika Kihara

FRANKFURT/WASHINGTON (Reuters) - Meeting students at the University of Amsterdam in April last year, European Central Bank President Mario Draghi extolled the virtues of courage, recalling a story his father had told him:

"In between the wars, he saw an inscription on a German monument, a German statue saying that 'if you lose your money you've lost nothing, because with a good business you will take it back; if you lose honor, you've lost a lot, but with good heroic action you can get it back; but if you've lost courage, you've lost everything.'"

Draghi showed his steeliness at the height of the euro zone crisis, vowing to do "whatever it takes" to save the currency.

Now investors would like him to show the same mettle again and take bold policy action to buoy the euro zone economy and steer it away from the economic quicksand of deflation. With no 'shock and awe' policy move in sight, they may be disappointed.

Draghi has shelved one bite-sized measure the ECB had discussed, essentially thinning its armory to a "big bazooka" - U.S.-style quantitative easing that would be difficult for some ECB policymakers to stomach - or nothing.

The risk is that the ECB fails to act early and aggressively enough, and that a cocktail of downward cost pressures sucks the economy into a quagmire of falling prices.

So far, the ECB insists inflation expectations are sound, or "anchored" in central bank parlance, and there is no risk of deflation, which would lead households to defer purchases, crimping demand and entrenching a downward price spiral.

But the situation is fragile and could change quickly.   Continued...

European Central Bank (ECB) President Mario Draghi waits for the start of the European Parliament's Economic and Monetary Affairs Committee in Brussels December 16, 2013. REUTERS/Francois Lenoir