A good shepherd for Europe's revival After years of firefighting against the eurozone sovereign debt crisis, Mario Draghi has become a little more optimistic. In a speech at Davos last week, the European Central Bank president said he saw "dramatic" improvements in the euro area, with risks declining in both the core countries of the north and the periphery. On the whole his assessment looks accurate. Growth has slowly returned and even embattled countries such as Ireland and Spain are picking themselves up. Just as strikingly, most government bonds have proved resilient to the sharp sell-off hitting emerging markets. Yet, as Mr Draghi knows well, the eurozone has not yet turned the corner. For a start, corporations are still starved of the funds they need to invest in new projects. In spite of the ECB's ultra-low interest rates, lending to companies in the eurozone fell by 3.9 per cent in November, the steepest contraction on record. Even more worrying is the downward trajectory of inflation. Eurozone prices grew by 0.8 per cent in the year to December, with crisis-hit countries such as Greece and Portugal registering rates well below that. Were low inflation to turn into outright deflation, it would become much harder for governments to manage their debt piles. Falling prices would also induce shoppers to postpone their purchases, weakening demand. Optimists argue that bank lending will stop shrinking once the recovery gathers pace. Inflationary expectations remain anchored to the ECB's 2 per cent target, a sign that price growth should pick up again relatively soon. Still, while the eurozone economy is in no imminent danger, it remains vulnerable to possible shocks. The sources of uncertainty are many. One is the turmoil in emerging markets. Despite what eurozone officials say, the upheaval may spread to the frailest countries in the periphery (Greece has already been affected). Another is the ECB's ongoing balance sheet assessment of the banking sector. The risk is that the weakest lenders will not be able to raise enough capital. This could force a widespread bail-in of creditors which could, in extremis, trigger a funding freeze. Mr Draghi has wisely signalled that the ECB stands ready to act if conditions worsen. Analysts are confident that, once the banks have shown they are serious about raising new capital, the central bank will extend to them liquidity in the form of a longer-term refinancing operation. Another widely tipped option is for the ECB to cut the deposit rate, so that banks have to pay for the money they park at the central bank. This move would be politically uncontroversial but may not achieve much except for lowering the exchange rate a little. The obvious, much bolder move would be for the ECB to purchase government bonds, following in the footsteps of the world's main central banks. Provided that the ECB only buys bonds on the secondary market, this kind of quantitative easing would be legal under European law, which only prohibits direct financing of government debt. But such a scheme would meet deep opposition in surplus countries and would almost certainly split the ECB board. Politically, a more realistic alternative is for the ECB to buy bundles of bank loans to businesses and consumers - an idea Mr Draghi has also floated. However, this option would encounter significant technical difficulties, since the market for asset-backed securities in Europe is all but dead. It would also place significant credit risk on the central bank's balance sheet, which governments may have to be willing to indemnify. Whichever route the central bank chooses, it must act quickly. The ECB has guided the eurozone out of the worst phases of the crisis. It should now take a leading role in securing the recovery.