In December, with Europe's financial system on the brink of disaster, the European Central Bank (ECB) stunned the markets with an unprecedented intervention, offering banks across the euro zone essentially unlimited liquidity against any and all collateral for an exceptional period of three years.
The ECB's surprise liquidity operation put the continent's crisis on hold. But now, just four months later, matters are again coming to a head. The big southern European countries, Spain and Italy, battered by austerity, are spiralling into recession. The deterioration of economic conditions is casting doubt on their governments' budgetary arithmetic, undermining political support for structural reform, and reopening questions about the stability of banking systems.
The hurdles to further monetary-policy action are high but are largely self-imposed. At its most recent policy meeting, the ECB left its policy rate unchanged, citing inflation half a percentage point above the official 2 per cent target. Board members may have also been concerned by evidence of cost-push inflation in Germany. IG Metall, the leading German trade union, has called for a 6.5 per cent wage increase in the next annual round of negotiations. And German public-sector workers obtained an agreement at the end of March that boosts wages by 6.3 per cent in the coming two years.
But this increase in German labour costs is precisely what Europe needs to accelerate its rebalancing, because it will help to realign the competitive positions of the northern and southern European economies.
Southern Europe needs to enhance its competitiveness and export more, and has been criticised - not without justification - as failing to do more along these lines. But what matters are southern Europe's costs of production relative to those of Germany, Europe's export champion. That is why the prospect of rising German labour costs, after a decade of stasis, is one of the few positive economic developments on the European scene - hardly something that the ECB should resist.
And the fact that higher wages in Germany will be matched by lower wages across southern Europe suggests that continent wide inflationary pressures will remain subdued. With euro-zone unemployment above 10 per cent, it is hard to see how things could be otherwise. .
A second argument against further monetary-policy action is that it should be considered only as a reward for budgetary austerity and structural reform, areas in which politicians continue to underperform. Where spending cuts should help to dampen inflation, European governments are backtracking on budgetary commitments.
With governments hesitating to do their part, the ECB seems to think that rewarding them with monetary stimulus - keeping the boat afloat with more spending - only relieves the pressure on national officials to do what is necessary.
If this is the ECB's thinking, it is playing a dangerous game. Without spending and growth, there can be no solution to Europe's problems.
The ECB is preoccupied with moral-hazard risk - the idea that supporting spending will relieve the pressure on governments to act. But it should also worry about meltdown risk - about the danger that its own failure to act, by leading to a deep recession, will undermine political leaders' ability to take the steps needed to put their economies on a sound footing.
The ECB will object, not without reason, that monetary policy is a blunt instrument with which to rebalance the European economy. A cut in policy rates or "quantitative easing" by another name will do nothing to enhance the troubled southern European economies' competitiveness.
True enough. But, without economic growth, the political will to take hard measures at the national level is unlikely to be forthcoming. Without support from the ECB economic recovery and political leaders' commitment to structural reform will remain purely aspirational.
Barry Eichengreen is a professor of economics and political science at the University of California, Berkeley