Germany's fear of QE is what's stopping us from cracking open the Cava

Now you can cut government spending until you are blue in the face but as long as there is any deficit at all then the total stock of debt will be rising. And if GDP doesn’t increase, the ratio of debt to GDP will rise. So some of these eurozone countries have been running faster and faster – to take a few steps back.

This is where the second worrying aspect comes in – inflation, or rather the lack of it. It now stands at only 0.5pc. In Greece it is negative – that is to say there is deflation – to the tune of 1.6pc. And the other peripheral countries are only just above zero.

This is significant because deflation increases the debt burden. As prices fall, tax revenues fall, and the nominal value of the debt (and the interest paid to service it) remains the same. Just as inflation reduces the real value of the debt, so deflation increases it.

The ECB has finally woken up to this danger. Last week’s cut in interest rates is designed to try to head it off. With banks now having to pay the ECB to hold deposits with it, they should be encouraged to lend more and buy assets, while also discouraging them from paying up for their own deposits, thereby encouraging their depositors to spend money or to buy assets. And it was also designed to weaken the euro.

The theory is clear enough and I support the policy. But it really is too little too late. Such a small cut in rates will have negligible effect.

Why has the ECB been so reluctant to do what the Federal Reserve, the Bank of England and the Bank of Japan have done – namely to engage in outright QE? It has done something quite similar and is apparently gearing up to do the real thing. It has not done outright QE because the Germans don’t believe in it.

They might be prepared to support a small amount of QE but doubtless they are hoping that the president of the ECB, Mario Draghi, can pull off a masterstroke such as his announcement of Outright Monetary Transactions (OMTs) in 2012, which calmed the markets without a single bond having to be bought.

If the prospect of QE could do the job of QE without it ever having to be started that would suit them very well. But I doubt whether Mr Draghi will be able to pull off this trick again. If he wants what QE can do then he will have to deliver QE – and in pretty large amounts.

What holds the Germans back is two things. First, they have a visceral fear and loathing of inflation. A policy of deliberately printing huge amounts of money just doesn’t go down very well on the Cologne omnibus.

Moreover, the German establishment fears that the buying of government bonds on the market would take the pressure off heavily indebted eurozone governments to reform and retrench. Bond market pressure was supposed to be one of the central ways through which, without a fiscal and political union, the big spenders of the eurozone were to be kept in check.

So the policy which might at least keep the eurozone afloat is being scuppered by the consequences of the euro’s inherent structural weakness, ie, that it is not combined with fiscal and political union. The outcome, I suspect, is that eventually the Bundesbank will reluctantly agree to a bit of QE but, deliberately, it will be too small to make much difference.

Meanwhile, the debt will continue to increase, unemployment will remain at these appallingly high levels and, unless something dramatic happens, the eurozone will slip towards deflation.

All of this is reminiscent of Japan. We are now some six years into the eurozone’s crisis: at the equivalent point in Japan’s crisis, which started in 1991, inflation was just about the present eurozone rate, as was the rate of decline of bank lending.

Two things were different. First, property and equity prices in Japan had slumped – and carried on falling. In the eurozone by contrast – apart from in Ireland and Spain – there has been no dramatic drop in property prices, and equities have also been reasonably stable. So some comfort there.

But the second difference offers no comfort at all. We are all familiar now with the expression “Japan’s lost decade”, but in fact there were two. More importantly, these decades were not exactly lost, because output continued to grow – albeit slowly.

By contrast, eurozone GDP still stands 2.5pc below where it did in 2008; and eurozone GDP is now 11.5pc lower than Japan’s was at the equivalent stage in its travails. I wonder why this is. Could it perhaps have something to do with the euro?

Roger Bootle is managing director of Capital Economics. roger.bootle@capitaleconomics.com

His latest book, The Trouble with Europe, has just been published by Nicholas Brealey Publishing, rrp £18.99.

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