But instead of doing anything about it, the ECB has just told people to pay no attention to the disinflation behind the curtain. It was all, they said, due to one-off factors that would reverse themselves. So no need to worry about a Japanese-style lost decade with low growth and low, or even negative, inflation feeding off each other in a cycle of quiet doom.
This façade lasted until August. That's when ECB chief Mario Draghi finally admitted, in some off-script remarks, that inflation had fallen too low, and Europe's governments had to help out by doing less austerity. Cue the German freakout.
Now here's what you need to remember about the ECB. It hasn't been willing to do anything without the German government's buy-in. (The German central bank is a lost cause that's compared Draghi to the devil—yes, really—for being open to printing money). Of course, this isn't how central banks are supposed to work—they're supposed to be independent—but it's how Europe works. Or doesn't. Once you understand that, you understand why Europe has floundered from one existential crisis to the next. There will be a problem, the ECB will dawdle, then it will try to persuade Angela Merkel to get on board, they'll debate whether it should do too little too late or too late too little, and then, finally, the ECB will do just enough to keep the euro zone from falling apart.
But now even the bare minimum is too much for Merkel. That's because, now that interest rates are zero and the ECB is buying private sector bonds, that bare minimum has turned into the one thing Germany won't agree to: buying government debt, aka quantitative easing. The German public (falsely) believes this would amount to little more than another bailout for southern Europe—especially now that their new anti-euro party is egging them on.
That leaves a few possibilities. Draghi could just go ahead and do QE regardless of whether Merkel supports him. That seems unlikely, though, since Germany would probably challenge its legality and might even threaten to leave the euro zone over it. Alternatively, Merkel could give Draghi her tacit support, while trying to co-opt the backlash for herself. But this also seems unrealistic, since it's too hard to predict how Germany's anti-euro politics would play out for Merkel to gamble 60 years of integration on it.
Instead, there will probably be another grand bargain. The first one said that, if need be, the ECB would buy a country's bonds in unlimited amounts to keep their borrowing costs low, as long as they did austerity. That last part is what got the Germans to support it, and they could try the same trick again. This time, they could say the ECB will buy each country's bonds, in proportion to their economy's size, as long as they make structural reforms. This is a catch-all phrase that basically means making it easier to fire people. When it's too hard to do so, as it is in southern Europe, companies are wary about adding full-time workers and only hire young people for part-time ones instead. Germany attributes its own economic success, which is actually pretty overrated, to pushing through these kinds of unpopular changes a decade ago, and it's obsessed with making the rest of Europe do the same. Maybe so much that it'd be enough for them to let the ECB save the euro again.
But there's a less sanguine possibility. The ECB could keep not doing enough, Germany could keep blocking them from doing more, and Europe could keep stagnating. It's their choice.