Afternoon Must-Read: Wolfgang Münchau: Eurozone Must Act Before Deflation Grips

has nothing to do with the price of oil. Its cause is a series of policy errors over several years–the interest rate increase in 2011, the failure to act when inflation rates dropped off a cliff in 2013 and the pursuit of austerity in a recession. If the European Central Bank had met its inflation target of ‘close to but below 2 per cent’, the oil price collapse would have been harmless….

A year ago it was said that the eurozone was only one shock away from deflation. Since then, we have had two: Russia’s aggression against Ukraine and the fall in the oil price. Shocks happen…. But beware the second-round effects, those that come with a delay. There are already signs that German pay negotiators are dropping the ECB’s 2 per cent inflation target in their wage formulas….

My expectation is that QE will fall short for a number of reasons. The size of the purchases may not be large enough… may simply not work as well in an economy with a smaller capital market and a different system of housing finance…. A helicopter drop would work but sadly, I fear, it would be too unconventional for the continental European mind. A slightly more realistic possibility would be a combination of QE, an external stimulus from oil and a fiscal boost…