Large parts of the eurozone are slipping deeper into a deflationary trap despite negative interest rates and one trillion euros of quantitative easing by the European Central Bank, leaving the currency bloc with no safety buffer when the next global recession hits.

The ECB is close to exhausting its ammunition and appears increasingly powerless to do more under the legal constraints of its mandate. It has downgraded its growth forecast for the next two years, citing the uncertainties of Brexit, and admitted that it has little chance of meeting its 2pc inflation target this decade, insisting that it is now up to governments to break out of the vicious circle.

Mario Draghi, the ECB’s president, said there are limits to monetary policy and called on the rest of the eurozone to act “much more decisively” to lift growth, with targeted spending on infrastructure. “It is abundantly clear that Draghi is played out and we’re in the terminal phase of QE. The eurozone needs a quantum leap in the nature of policy and it has to come from fiscal policy,” said sovereign bond strategist Nicholas Spiro.

Mr Draghi dashed hopes for an expansion of the ECB’s monthly €80bn (£60bn) programme of bond purchases, and offered no guidance on whether the scheme would be extended after it expires in March 2017. There was not a discussion on the subject. 

“The bar to further ECB action is higher than widely assumed,” said Ben May from Oxford Economics.

The March deadline threatens to become a neuralgic issue for markets given the experience of the US Federal Reserve, which suggests that an abrupt stop in QE stimulus amounts to monetary tightening and can be highly disruptive.

David Fuller's view

Panic and anger grip the EU and the ECB is in the firing line.  The article above observes: “Public trust in the ECB has collapsed in several countries and the mood in Germany has turned toxic.” 

No doubt but in fairness to Draghi, he saved the EU from an earlier collapse, while repeatedly calling for fiscal spending and investment.  Unfortunately, Herbert Hoovers in the Bundesbank were having none of it.  Meanwhile, Brussel’s contribution was the creation of more regulations.  This is the burning barn that disappointed UK Remain voters wish to run back into.  Some of them like the EU’s unions, employment laws and the 30 to 35-hour week.

Here is a PDF of AE-P’s article.