Austerity overload

The following editorial appears on Bloomberg View.

Investors were expecting bad numbers, but not this bad: Europe's economies stalled in the second quarter, new figures show. How much longer will Europe's policy makers just stand there?

All three of the euro area's biggest economies - Germany, France and Italy - are failing. Germany's output actually fell in the second quarter. So did Italy's, for the second consecutive quarter. The European Central Bank currently forecasts a rise in euro-area output of just 1 percent this year. Expect that to be revised down next month.

With inflation in the euro area running at 0.4 percent - way below the ECB's target of less than but close to 2 percent, and far too close to outright deflation - why isn't the ECB trying harder to ease monetary policy? The euro area needs quantitative easing of the kind applied by the Federal Reserve and the Bank of England. The case for this has been strong for months; now it's overwhelming.

The ECB is nervous because outright QE faces political and legal obstacles. One way or another, those issues will have to be resolved - and that's what ECB President Mario Draghi needs to start saying. Whatever it takes, Mr. Draghi.

Monetary easing, though, isn't enough. The euro area also needs to rethink its fiscal policy. France just did - demanding that its deficit-reduction target for 2014, imposed by the European Union, be relaxed. This makes sense. In a stagnating or shrinking economy, fiscal austerity can be self-defeating: If it slows economic growth even more, a fiscal squeeze can add to the burden of public debt.

German policymakers have resisted proposals to loosen the euro area's agreed fiscal targets. The European Commission has echoed the same line, insisting that supply-side reforms are the key to recovery. This is short-sighted. Europe needs both demand-side and supply-side stimulus - but the first is both more urgent and can be delivered more promptly.

Europe's economy is in a dangerous place. Its fiscal and monetary policies need to change, and there's no excuse for further delay.

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