The Shadow ECB Council held a conference-call on 27 March, 2014 to discuss whether and which monetary policy measure would be appropriate to deal with the continued inflation undershoot and to counter the threat of deflation. There was broad consensus that the low and declining inflation rate in the euro area as a whole and negative rates in some individual countries pose a serious problem; more serious than ECB representatives
would admit. Five of 13 voting members advocated a cut in at least one policy rate. One member advocated a hike. Quantitative easing was discussed, but there was not consensus on whether QE should be employed right away or only if the situation deteriorated further.
My comment: While a further rate cut will not hurt, it is quite clear that it will not do much to alleviate the main problem: the shrinking of the domestic money supply due to banks’ reluctance to lend and their customers’ reluctance to take on even more debt. The ECB could and should tackle this problem directly. Since it can print as much money as it pleases, it is only lack of imagination, which can prevent it from finding ways to get more money into circulation – and lack of willingness to make it plain to everybody that commercial banks are not needed to create money and that money does not need to be as scarce as it is.