Wrong side...

...of money creation.

This is part of Europe's problem.  Without any power over Fiscal expenditures, quantitative easing will be far less effective to counteract deflation.  In fiat currency systems, there are two main channels for money creation:  Fiscal spending and Loans (private sector financial net savings increases with Government spending and Loans create Deposits in reserve accounting, non-convertible currency systems).

Loan creation is a finicky mechanism as the demand for capital is not necessarily constrained by high interest rates, which leaves us with Fiscal policy as the primary means Governments have to combat deflation.  This issue has yet to resolve itself but the balance points seem to be shifting to brinksmanship on the part of smaller EU members.  Rational behavior but unfortunately not exactly forward looking with respect to the survival of the EU.  The ECB can site as many policy instruments as it likes, but the central fact remains it has run out of time.  It is silly that Novotny does not see deflation as THE threat.

By Steven C. Johnson

NEW YORK, April 27 (Reuters) - Euro zone interest rates will stay low for some time and the European Central Bank is ready to use unconventional policy if needed to ensure access to credit, an ECB governing council member said on Monday.

"We will keep the interest rate very low for as long a time as is required and stand ready to use unconventional measures of quantitative easing to assure European firms and consumers access to credit at appropriate conditions," the member, Ewald Nowotny, said in prepared remarks at the Austrian consulate.

The ECB meets in early May and markets expect it to cut the benchmark interest rate from 1.25 percent to 1 percent, while markets are also on alert for signs of unorthodox measures.

Other central banks, including the U.S. Federal Reserve, have cut rates to or near zero and adopted quantitative easing policies such as buying corporate or government debt.

Nowotny did not deliver the prepared speech in full, however, and in a question-and-answer session, said he would not comment on steps the ECB might take at its May 7 meeting.

Nowotny, who is also governor of the Austrian central bank, also stressed that the ECB would do what is necessary to stabilize inflation expectations and said fiscal policy is also important for helping the economy recover.

In answer to a question, he said he did not see deflation as a threat and pointed to the ECB's low deposit rate as another important factor helping to stimulate growth.