ECB officials are navigating a perfect storm of tepid growth, sagging consumer prices, and an emptied policy toolbox. The combination is not entirely unfamiliar to economists – it characterized Japan’s ‘lost decade’ of the 1990s, when the bursting of a real estate asset bubble ushered in years of economic stagnation.

Can (un)conventional monetary policy help the euro zone avoid the same fate?

Background

The euro zone is no stranger to the threat of deflation. It descended briefly during the Great Recession, then reappeared again – lingering on-and-off for years – during the Greece sovereign debt crisis, eventually spurring the ECB to try its hand at the ‘unconventional’ monetary policies that have now become the norm in developed economies. More recently, amidst the advanced stages of COVID-related economic shocks, deflation has returned to haunt the euro zone. December marked the fifth consecutive month of a sub-zero rating on the Harmonized Index of Consumer Prices (HICP), ringing alarm bells at the ECB headquarters in Frankfurt.

But after already reaching into the furthest depths of its policy toolbox in an attempt to insulate the economy from the worst impacts of COVID-19, what more can Europe’s central bankers realistically do?

The ECB is already running a full-court press of stimulus policies intended to dampen the effect of COVID-related shutdowns on euro zone economies. These include: