How will Europe’s economy escape the doldrums?

Can Mario Draghi save Europe?

Draghi heads the European Central Bank, the continental equivalent of the Federal Reserve. The fact that the question is being asked is an unsettling reminder that the “European crisis,” once declared over and done, is anything but. Europe resembles a patient with a chronic condition. Sometimes the patient’s health gets a bit better, sometimes a bit worse, but the illness persists and constantly threatens to cause acute, possibly catastrophic distress.

Although Americans are rightly upset about the slow recovery from the 2007-2009 “Great Recession,” the U.S. rebound has been speedy compared with the one in Europe: Since 2008, Europe has experienced two recessions (periods when the economy declined for at least half a year) and may now be on the verge of a third. The output of the U.S. economy has surpassed its early 2008 level by about 8 percent, according to data Draghi presented at a recent briefing. Meanwhile, the output of the euro zone — the 18 countries using the euro as their common currency — is still 2 percent below its 2008 level.

Private investment has collapsed. It’s down about 15 percent from 2008. Public investment (in schools, roads, hospitals) has dropped about 20 percent. The social consequences are horrendous. In September, the euro zone’s unemployment rate was 11.5 percent, only a slight decline from a 12 percent peak a year earlier. Among the young (under 25), the average was 23.3 percent. In Italy, Spain and Greece, it was near 50 percent.

Granted, the misery is spread unevenly. Germany’s unemployment was 5 percent, but even there, the economy is slowing. “The Ukraine-Russia conflict is taking its toll,” says economist Desmond Lachman of the American Enterprise Institute. “In 2015, they’re expecting less than 1 percent economic growth. That’s pretty close to a recession, and Germany is supposed to be the engine driving Europe.”

All this matters. Europe is a drag on the global economy, including the United States. About one-fifth of U.S. exports go to Europe. Also, about half the overseas profits of U.S. multinational firms originate in Europe, says Dartmouth economist Matthew Slaughter. If these weaken, so could U.S. stock prices and the consumer spending and confidence tied to the market.

And then there are the political ramifications. Economic stagnation has fed nationalism and populism. Conflict between weak economies (Italy, Spain, Greece, France) and stronger competitors (Germany, the Netherlands) continues. Differences undermine Europe’s capacity to act decisively on other issues, from the Middle East to Ukraine.

The main causes of Europe’s economic stagnation seem clear, though their relative importance is hotly debated. Here’s the conventional list: a) the euro itself, which prevents weaker countries from devaluing their own currencies to stimulate their economies; b) high government debt, which leads countries to cut spending or raise taxes — policies that critics denounce as self-defeating austerity; c) overregulation of business, which discourages start-ups, hiring and investment (these policies are obscurely called “structural”); and d) a timid European Central Bank.

The rap against the ECB is that it hasn’t been as aggressive as the Fed. Though accurate, the criticism is overdone. The ECB has repeatedly cut interest rates and acted to shore up Europe’s fragile banks. In late 2011 and early 2012, it made available $1.4 trillion of three-year, low-cost loans to quash fears that banks would exhaust their cash. In mid-2012, Draghi pledged that the bank would “do whatever it takes” to save the euro — a commitment that reassured financial markets and led to a sharp fall in interest rates.

The trouble is that low interest rates won’t spur economic growth if lenders don’t want to lend and borrowers don’t want to borrow. That has been true in Europe. So the ECB is now starting so-called quantitative easing — the direct purchase of bonds by the central bank. This will inject money directly into the system in the hope that the recipients will use it to make new loans or buy stocks.

Will it work? The Fed’s just-ending quantitative easing was worth more than $3 trillion. Experts are divided about how much it helped the economy. But even if Draghi’s version succeeds, it will provide at best a temporary boost.

So says Draghi himself. Europe’s task, he argues, is to dismantle all those “structural” obstacles that frustrate a permanently faster rate of economic growth. Easy credit isn’t enough. Here’s how he put it in a recent media interview: “If — for a young entrepreneur — it takes months in some countries before he can have the permits [and] the authorizations to open a new shop, he will not ask for this credit.”

Without faster growth, much of Europe risks deflation — price declines reflecting feeble demand — that would make its debt burden heavier. Chronic stagnation could give way to something worse.