It's high time for ECB to take action on quantitative easing

The European Central Bank is playing with fire, and unless it takes quick action with new reflation efforts, the euro-zone economy could end up very badly burned. The euro-zone economy is on the brink of deflation and some nasty shocks could be on the way from crises unfolding in Greece and Russia.

The ECB has to deliver quick. It has been tinkering at the policy margins for far too long and has run out of ammunition in running interest rates down to zero. And its recent market re-funding efforts have fallen well short of what is needed.

It must now marshal all its energy into flooding the euro zone with new liquidity to spur growth and generate jobs. It is time for full-blown quantitative easing, opening the doors to sovereign bond buying and printing money in abundance to kick-start recovery.

Deflation will crash land on the euro zone as early as next month, putting the ECB under pressure to act on quantitative easing. With oil prices still in free fall and euro-zone inflation already running as low as 0.3 per cent, inflation will continue to push much deeper into negative territory next year. This will be a huge blow to ECB credibility, especially since president Mario Draghi recently nailed his colours to the mast and pledged to "raise inflation and inflation expectations as fast as possible".

As Japan learned to its cost, deflation is unlikely to be a short-term feature for the euro zone. Japan's economy has been stuck in a 20-year deflationary spiral, thanks to successive policy failures. It is a cycle the ECB needs to break very quickly.

To do this, it must mobilise quantitative easing as a priority. It already has blueprints for recovery from the US and British programmes that have brought both economies back to life.

Unfortunately, the ECB's balance sheet has been in serious decline over the past two years, dropping from a peak of over €3 trillion (HK$28.4 trillion) to just over €2 trillion recently. It means euro-zone bank credit, the life-blood of recovery, has been in short supply for consumers and businesses.