ECB must act as Draghi confidence trick wanes

LONDON: Mario Draghi knows how to show some urgency. It's time he did it again.

The head of the European Central Bank is starting to look slow in his response to stagnation in the euro zone.

A cut to the ECB's 0.75 percent benchmark rate is overdue.

The ECB's latest forecasts for the euro zone pencil in a 0.5 percent contraction in GDP this year, with growth in 2014 of between zero and 2 percent.

That alone would justify some monetary stimulus. Forecasts for inflation of just 1.6 percent this year and 1.3 percent in 2014 give further grounds for action.

The zone is getting dangerously close to a deflationary trajectory, even though the ECB's inflation target is 2 percent.

Draghi waved a remarkably effective magic wand last summer, saying he would do "whatever it takes" to convince the market of the solidity of the single currency.

He later spelt out a policy of possible outright purchases of the government debt of euro members.

That sent euro zone bond yields helpfully down, and the euro less helpfully up.

Now he faces an economic crisis and needs something more than a confidence trick.

If the same weak data afflicted the United States, Japan or the UK, the talk would be of quantitative easing.

But printing money to buy government bonds is a technical challenge in the fragmented zone, with bond yields extremely low in Germany and too high in recessionary Spain and Italy.

Pushing the button on OMT bond buying isn't an easy answer either. The ECB can only buy the bonds of a country that has agreed a reform programme, which may mean unpopular measures.

Italy is an obvious candidate. But if the Italian electorate has turned against austerity, what programme might Rome agree to?

The only fresh stimulus the zone seems about to get is an easing of the euro against a dollar amid increasing evidence of a US recovery. Draghi is understandably wary of negative rates.

But the fact that the ECB has not already moved to cut its benchmark policy rate is remarkable. He needs to act sooner rather than later.