Afternoon Must-Read: Wolfgang Munchau: Draghi is running out of legal ways to fix the euro

Wolfgang Münchau: Draghi is running out of legal ways to fix the euro “The ECB is failing to deliver on its inflation target…

not because it has run out of instruments but because it has based its policy on a poorly performing economic model… [and so] has committed three errors…. The ECB should have embarked on large asset purchases and cut interest rates to zero early on…. Mr Draghi’s promise to buy eurozone government debt… made everybody, including the ECB itself, complacent… [and] ended all crisis resolution. The third mistake was to misjudge the dynamics of the fall in inflation rates late last year….

By pussyfooting around… the ECB has signalled that it is safe to bet against the inflation target…. To undo this would take some heavy lifting…. The ECB should start by ditching the inflation target and replacing it with a price-level target…. The ECB should starting buying equities and junk bonds. It should subsidise mortgages and consumer credit. It could fund an investment programme in transport infrastructure, energy networks and scientific research…. All these measures would be effective. Most would be illegal. The one thing the central bank can do without any legal problems would be to drop the silly macroeconomic model–known as the Smets-Wouters model, after its authors–on which it has been relying for too long. My guess is that the ECB will not do any of these…