By Giovanni Legorano, Brian Blackstone and Liam Moloney
MILAN--Annual inflation in the eurozone weakened to a five-year
low in September and consumer prices actually fell in Italy,
raising pressure on the European Central Bank to do more to
stimulate the region's struggling economy.
But economists have grown increasingly concerned that even
beefed up ECB action, such as large-scale government bond
purchases, would be far less effective in the eurozone than similar
measures in the U.S. and U.K. have been in boosting growth
there.
In short, the ECB's patients aren't responding to its medicine.
Italy, economists and business leaders say, is Exhibit A.
"There's very little demand for loans for investments, because
entrepreneurs' confidence is at an all-time low," said Giuseppe
Castagna, chief executive of Banca Popolare di Milano.
ECB officials have signaled their concern, too, while warning
they are limited in their ability to improve the bloc's growth
prospects without economic reforms and other measures by
governments to spur demand.
The bank meets Thursday and is expected by analysts to refrain
from additional measures, after cutting rates to fresh lows in
September and unveiling a new program to purchase private debt.
Officials are likely to provide details on how that program,
intended to purchase asset-backed securities and covered bonds,
will work.
The ECB is considering rules that would allow it to purchase
some securities issued by Greek and Cypriot banks that carry a junk
rating as well, in an effort to ensure the program applies to all
of the bloc's 18 members, a person familiar with the matter said
Tuesday.
But pressure to do more intensified after the European Union's
statistics agency reported annual eurozone inflation was just 0.3%
in September, down from 0.4% in August and far below the ECB's
target of a little below 2%. Consumer prices fell 0.2% on the year
in Italy, confirming a deflationary trend in the eurozone's
third-biggest economy, after Germany and France.
ECB officials are expected to keep the door open to additional
measures, if needed, to keep inflation from staying too low for too
long, including purchases of government bonds, which is known as
quantitative easing.
Andrew Roberts, co-head of European economics at RBS, expects
the ECB to begin quantitative easing by November or December.
"Italy is the reason," he said in a research note, "and delay
could prove terminal, especially with the data showing Italian
economic weakness is deepening."
According to International Monetary Fund data, Italy's gross
domestic product, adjusted for inflation, posted no growth between
2000 and 2013. U.S. output is up 25% over that time.
Italy has suffered three recessions since 2008 despite low ECB
interest rates and abundant bank-lending measures. The government
forecast Tuesday that Italy's economy would contract 0.3% this
year, returning to just 0.6% growth in 2015.
"People have talked about Japan's lost decade. Italy has had a
lost two decades," Mr. Roberts said.
ECB officials have said they want to increase their balance
sheet, currently EUR2 trillion ($2.5 trillion), back to its
early-2012 levels, implying an increase of EUR700 billion to EUR1
trillion.
Analysts warn that the prospect of a flood of newly created ECB
money will do little to restore vibrant growth in Italy and other
struggling countries weighed down by weak confidence, rigid labor
markets and uncertainty over government tax and spending
policies.
"New investments nowadays are a pure hazard," said Antonella
Lattuada, a partner in the mechanical engineering company Lamar SRL
in the Milan area. "There's so much uncertainty that only very few
companies make long term plans."
ECB measures to date have had little effect.
Most notably, a 2012 program for buying government bonds, called
Outright Monetary Transactions, brought their yields down sharply
across the eurozone without even being used. In Italy's case, the
10-year yield fell from more than 6.5% in July 2012 to around 2.4%
now.
In countries such as the U.S., this would have had significant
knock-on effects. Homeowners would be able to refinance mortgages
at lower rates, generating extra disposable income to spend.
Businesses would benefit from lower long-term borrowing costs,
too.
But these channels are clogged in Italy and elsewhere in Europe,
where most lending is done through banks rather than the capital
markets. Unemployment is high in Italy, especially for young
people, limiting their ability to take advantage of lower borrowing
costs. Government austerity policies aimed at reducing one of the
world's largest debt burdens are another brake.
Alfio Magnesi, the owner of Ideostampa, used to replace
machinery at his printing company in central Italy every 10 years.
After seven years of crisis and a restructuring that brought the
small company back into the black, he decided he won't make any new
investments. Italy's economic prospects are too grim, he says.
In the past, he took out loans to buy expensive machines. But
now, even though he would qualify for bank financing, he says no
bank could persuade him to take out a loan.
Italian banks took about one-fourth of the EUR84 billion
($106.56 billion) the ECB lent to banks in four-year funds in
September. The country's bankers say that while they would welcome
demand for new lending and longer-term funds, the bulk of the
requests they have received so far is for refinancing existing
loans.
A few Italian companies are taking advantage of the ready cash
to borrow and invest.
"Some banks have been banging on our door to offer [ECB] funds,"
said Gianluigi Casati, the head of Fonderia Casati, which makes
castings for the engineering sector. "We played one bank against
the other to get better terms. We had the upper hand and it felt
nice as it was a long time we weren't in that position."
Mr. Casati said the company was also considering issuing a bond
to finance its investments, an option he hasn't excluded yet.
But such stories are still rare.
Against that backdrop, quantitative easing by the ECB would be
seen as "doing it for the sake of doing it, not because it's seen
as tackling the right issues," said Raoul Ruparel, head of research
at London think tank Open Europe. "It's a bigger version of what
they're doing already, and that hasn't been working."
Write to Giovanni Legorano at giovanni.legorano@wsj.com, Brian
Blackstone at brian.blackstone@wsj.com and Liam Moloney at
liam.moloney@wsj.com