Will ECB's flood of cash be enough to save Europe's slide?

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European Central Bank president Mario Draghi unleashed an unexpectedly aggressive quantitative easing program in an all-out, and perhaps final effort to fight potentially damaging deflation and revive the moribund euro zone economy.

The sheer size of Mr. Draghi's QE onslaught marked his second genuine market surprise since he joined the ECB at the height of the European crisis in late 2011.

The first came in mid-2012, when he used a London news conference ahead of the Olympics to announce calmly that the ECB would do "whatever it takes" to keep the crisis-shaken euro zone intact. The assurance sent sovereign bond yields plummeting, allowing Greece to step back from the euro zone exit. It happened without the ECB spending a single euro to fund the sovereign bond-buying program that he promised to put into action if any euro zone country were to find itself losing access to the bond markets.

On Thursday in Frankfurt Mr. Draghi unveiled the second rescue mission, though this one involved spending vast amounts of newly created money. His QE effort is designed to flood the financial system with liquidity, pump up asset values and kick start stalled inflation. The launch of QE itself was no surprise; the surprise was the size of it – no less than €1.1-trillion ($1.6-trillion) of government and private bonds are to be purchased by September, 2016 and possibly more if inflation doesn't bounce back. That works out to €60-billion a month, about €15-billion a month more than most economists had expected.

Mr. Draghi, in effect, has set in motion the second version of his "whatever it takes" pledge.

Economists and investors were pleasantly shocked – British bank HSBC said the "punchier" package was "ahead of expectations." The European stock markets and the euro plummeted at the prospect of the wave of new money hitting the market, taking the one-year fall against the U.S. dollar to 15.8 per cent. While the ECB does not comment on, nor specifically try to adjust, exchange rates, the fall of the currency used in 19 European countries was just what Mr. Draghi wanted. An export-led recovery just got a bit easier.

Mr. Draghi's QE program was all the more surprising in that it managed to overcome well-telegraphed resistance from the German central bank, the Bundesbank, and the German contingent on the ECB's governing council. The Germans had been somewhere between cool and hostile to QE, for fear it would stoke too much inflation and remove any incentive from national governments to reform their economies to make them competitive.

But it appears their resistance was overcome by outright fear of the economy-wrecking fear of inflation. In December, year on year, consumer prices fell 0.2 per cent – the first instance of outright deflation since the height of the financial crisis. Prolonged deflation would sabotage the euro zone's tentative recovery by encouraging consumers and businesses to postpone purchases, in the belief that prices will get ever cheaper.

Mr. Draghi also appeased the Germans by revealing that 80 per cent of the bond risk will lie with the national central banks; the rest will be "mutualized." If, say, Greece were to default on its bonds, the losses would be largely contained within Greece, not spread among the taxpayers of Germany and other solvent countries.

While the ECB's QE program is committed through September, 2016, Mr. Dragi left open the possibility of extending it "until we see a sustained adjustment in the path of inflation, which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent over the medium term."

Will it work?

Some economists think QE will certainly help, but that, on its own, is unlikely to trigger an economic miracle. "There is no guarantee that QE will work," said ING Financial Markets economist Carsten Brzeski. "The ECB can prepare the grounds for more investment and activity, but it cannot force consumers to spend or companies to invest. … today's QE announcement is historic but it also the ECB's last trump card. There are no more hidden aces."

Indeed, Mr. Draghi's statement, while optimistic, tacitly admitted that the ECB was running out of tricks and that it was now up to the national governments to get serious about economic reforms.

At the ECB news conference, he made a plea to governments. "It is crucial that structural reforms be implemented swiftly, credibly and effectively," he said.

The trouble is, the positive market reaction to the big, fat QE program, as the Germans have warned, could encourage governments to slack off on reform. If that happens, Mr. Draghi is unlikely to embark on another rescue; his ammunition box is now pretty much empty.