If history has taught us anything, it is that we should pay attention when European Central Bank chief Mario Draghi goes off script.

The first time, of course, came when the euro was about to disintegrate in 2012. Back then, speculators were betting that the crisis countries would have to leave the euro zone, which actually made them more likely to do so by increasing their borrowing costs. It was a self-fulfilling prophecy of financial doom. And the only way to stop it was for the ECB to say it would. That's because investors can't beat a central bank that can print as much money as it wants — as long as it's determined to win.

But the ECB wasn't. It wasn't even sure what it wanted to do. So Draghi deliberately backed himself into a corner to force its hand. During an otherwise forgettable speech, he ad libbed that the ECB would "do whatever it takes to preserve the euro" and emphasized that "believe me, it will be enough." Markets did: Bond yields immediately started falling from ruinous to merely expensive levels. Now, the political genius was that Draghi could tell his hawkish colleagues that these were just off-the-cuff remarks, but he'd still created a commitment device for them. The ECB had to come up with a plan to back up Draghi's words. And after a few frantic weeks, it did just that: It promised, if need be, to backstop every euro country's debt in return for reforms. The self-justifying panic was over.


So it shouldn't surprise us that Draghi has recycled this trick now that the euro economy is disintegrating. Europe, after all, is probably still stuck in the same recession that the ECB forced it into when it raised rates to fight temporarily higher oil prices in 2011. Indeed, the euro zone as a whole didn't grow last quarter, and, at its current pace, it won't be long until its slump is worse than the worst of the 1930s. It's a depression, and a pretty great one at that.

But the ECB has taken a see-no-evil approach to this ongoing catastrophe. Even though inflation and, more worryingly, inflation expectations have fallen to just 0.4 percent, Draghi has refused to sound the "lowflation" alarm. Here's what he said about falling inflation expectations, which central bankers worry about more than the headline number itself, at his last press conference:

"On a specific point that was raised by a usually accurate market observer, also if we look at five-year inflation expectations, derived from the break-even of the linkers, we would observe a 0.5 percent inflation expectation. This was a quite interesting point, but at least we think the calculations should be done differently. We should observe, not one issue, but the overall universe of issuances of linkers with that maturity. And this would show that expectations over the five-year horizon are still anchored at 1 percent." (Emphasis added.)

Translation: There's nothing to worry about here.


Or is there? Just two weeks later, at his Jackson Hole speech, Draghi sounded more like one of his critics. And, as Lorcan Roche Kelly of Agenda Research points out, the most important part once again wasn't in Draghi's prepared remarks. Here's what he said, with the added part in italics:

"Inflation has been on a downward path from around 2.5% in the summer of 2012 to 0.4% most recently. I comment on these movements about once a month in the press conference, and I have given several reasons for this downward path in inflation, saying it is because of food and energy price declines; because after mid-2012 it is mostly exchange rate appreciation that has impacted on price movements; more recently we have had the Russia-Ukraine geopolitical risks, which will also exert a negative impact on the euro area economy; and of course we had the relative price adjustment that had to happen in the stressed countries as well as high unemployment. I have said in principle most of these effects should in the end wash out because most of them are temporary in nature — though not all of them.
"But I also said if this period of low inflation were to last for a prolonged period of time, the risk to price stability would increase. Inflation expectations exhibited significant declines at all horizons. The 5year/5year swap rate declined by 15 basis points to just below 2% — this is the metric that we usually use for defining medium term inflation. But if we go to shorter- and medium-term horizons, the revisions have been even more significant. The real rates on the short and medium term have gone up, on the long term they haven't gone up because we are witnessing a decline in long-term nominal rates, not only in the euro area but everywhere really. The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term." (Emphasis added.)

This doesn't sound as dramatic as "whatever it takes," but it is no less so. Draghi is saying that even if low inflation is due to temporary factors, like the ECB has insisted for awhile now, they can't afford to be complacent about it. That's because, as Draghi now admits, inflation expectations are falling too—which means low inflation actually might be here to stay.

Draghi is back where he likes to be: a corner of his own choosing. He's done what the rest of the ECB doesn't want to—dug his head out of the economic sand—and, in the process, created another commitment device for his colleagues. Specifically, he's said that the ECB will do quantitative easing (that's what "use all available instruments" means) if inflation and inflation expectations don't pick up. Now, the ECB was already starting to think about that, but just that. It would still take quite a bit of behind-the-scenes politicking to get them to actually do it. Draghi's trying to speed that up.

Draghi only had to say "whatever it takes" to end Europe's financial crisis. But Draghi will actually have to do whatever it takes to end Europe's economic one. That's what he's trying to do now, but the eurocrats might not let him.

They have their rules, after all.