While there are many catalysts for inflation, ranging from wage pressures to resources crunches, the primary culprit is usually monetary policy. As economic growth slows and inflation dips, governments and their central banks will intervene to counteract whatever their economical ailments may be. In the case of Europe, the ailment is slow economic growth that’s in danger of stalling.

On June 5^th, European Central Bank President Mario Draghi announced that his institution was holding true to his 2012 pledge to “do whatever it takes” to preserve the euro and revive the euro zone. The central bank cut its benchmark interest rate to a record low 0.15 percent, undercutting the record low rates here in the US and England. That would make EUR400 billion in cheap funding available that the region’s banks could lend to small- and medium-sized enterprises (SME).

But the bank also took the unprecedented step of cutting its deposit rate from 0 percent to -0.1 percent. Yes, you’re reading that right: the ECB went from paying no interest on deposits to actually charging banks 10 basis points for the privilege of parking money with it. No major central bank in the world has ever taken a step as drastic as essentially refusing deposits. The move makes a certain logical sense, though.

The primary impetus behind the program is the annualized pace of inflation fell to 0.5 percent last month, leaving policymakers concerned the region could actually tip to deflation. But even as economic growth and inflation have been slowing, European SMEs have been suffering through a severe credit crunch, facing interest rates as high as 10 percent on collateralized loans, if credit is available at all. That’s a situation which cannot be allowed to stand, since those same SMEs provide two out of every three jobs in the region and are the backbone of the euro zone’s economy.

As our own experience here in the US shows, though, just because you make cheap funding abundantly available to banks doesn’t mean that banks will lend. As the graph below shows, since the US Federal Reserve began pumping liquidity into our system in 2008, our own banks have opted to hold onto that cash rather than lending it. As a result, excess reserves held by our nation’s banks and on deposit with the Fed have exploded from what amounts to the statutory minimum in August 2008 to more than $2.6 trillion today.

Why would American banks hold on to all of that cash? For one thing, our economic recovery has been lumpy to say the least, swinging from gross domestic product growth of about 2.2 percent to a -1 percent contraction in the first quarter of this year. New financial regulations under the Dodd-Frank Act also continue to be hashed out, adding regulatory uncertainty to questionable economic conditions. On top of that, the Fed actually pays 0.25 percent interest on deposits it holds, so why take the chance when you have a risk-free return from the government?

Having watched our own experience with making cheap financing available, the Europeans have been schooled in the illogical proposition of paying banks to deposit money intended to be lent. That makes the ECB’s decision to couple cheap funding with an actual cost for deposits highly inflationary since most banks now have a real economic incentive to lend rather than hoard that cash. That is, unless there is a clear and present danger that the European economy may crash.

That doesn’t seem to be an entirely likely scenario, though. Draghi touched off a rally in European equities two years ago simply by standing beside German Chancellor Angela Merkel and uttering his now famous “do whatever it takes” line. A little over a week ago he made good on that pledge, introducing this latest round of support. But the ECB still has more moves to make. Draghi himself said, “Are we finished? The answer is no.”

Breaking Convention

While Europe’s economic authorities weren’t prepared to pull the trigger on a quantitative easing (QE) program, the ECB has said it is laying the groundwork to begin making outright purchases of asset-backed securities. That’s a tacit recognition that traditional policy tools have been exhausted, even as the ECB now forecasts that the euro zone will likely only grow by 1 percent this year while inflation isn’t expected to rise above 0.7 percent.

That anemic growth virtually guarantees that the ECB will ultimately resort to QE to kick start the economy, if for no other reason that because the promise has been made, the markets will expect it. That’s one of the downsides to the expectations game that global central banks have been playing since 2008. But it also means that there’s little danger of an outright collapse since the central bank stands ready to take further steps to support the economy if deflation appears imminent.

When you get right down to it, the ECB would have been hard pressed to come up with a more inflationary course of monetary policy short of simply handing out freshly printed euros on street corners.

An additional inflationary consideration is if the ECB’s strategy of negative interest rates proves successful in spurring lending, I wouldn’t be surprised to see it exported here to the US. To be fair, US banks are realizing a negative inflation-adjusted return on their reserves even as they collect their 0.25 percent interest. But in a risk-adverse environment, a risk-free investment is attractive to bankers working to make quarterly numbers. If the ECB successfully manages to spur banks to boost lending, the Fed is likely to follow suit even as it continues to ease the throttle on its bond purchases. If the Fed tries a negative rate, other central banks may try it as well.

Banking on Easy Money

European bank shares have been flat to slightly lower since the ECB announced its basket of new policy measures, but the banks clearly have the most to gain.

While the European easing experience will obviously be somewhat different than our own, American banks were some of the top market performers when the US Federal Reserve began resorting to unconventional monetary measures. Since the Dow Jones Industrial Average bottomed in March 2009 it has gained 137.7 percent while the Dow Jones US Financials Index is up by more than 240 percent. Our banks have benefited from low interest rates, cheap and abundant liquidity and the Fed’s bond purchases in the intervening years.

Banks tend not to respond well to inflation, per say, as old debts are repaid with less valuable future currency. The ECB’s decision to actually charge a deposit rate could also create a headwind if banks aren’t able to pass along their higher costs to consumers. But the central bank has already announced that it is making EUR400 billion in low-cost liquidity available for small business lending, with additional liquidity down the pike essentially a foregone conclusion.

European banks with large international businesses will also benefit from the weaker currency that can be expected as a result of stimulus efforts. A devalued euro will only serve to make the region’s exports more attractive, financial or otherwise, and many European banks have become globally diversified.

Considering that the financial sector as a whole is likely to benefit, a way to play the theme is with the iShares MSCI Europe Financials (NSDQ: EUFN) ETF.

The fund holds stakes in 97 European banks, real estate companies, insurers and diversified financial operations based in 12 countries across the continent, including the United Kingdom, Spain, France, Switzerland and Germany. Its top holdings include HSBC Holdings (London: HSBA), Banco Santander (Spain: SAN) and Loyds Banking Group (London: LLOY). Fully half of its bank holdings operate within the euro zone and use the euro as their base currency.

While the primary goal here is to gain exposure to European banks, which receive a 51.4 percent allocation within the fund, real estate is also an attractive inflation hedge and accounts for just less than 5 percent of assets in the ETF. Among its real estate holdings you’ll find companies such as Intu Properties (London: INTU), Land Securities Group (London: LAND) and Swiss Prime Site (Switzerland: SPSN) which managed residential, retail and industrial properties. All should come into high demand, both as the ECB’s efforts help to get the region’s economic wheels turning again and drives demand, and as investors turn to real estate to realize higher returns in a low-rate environment.

Insurers also figure prominently at 25.7 percent of assets and here the picture is a bit more mixed. Its top holdings in the sector range from the UK’s Prudential (London: PRU), the French AXA (Paris: CS) and Swiss Re (Zurich: SREN,) which tend to hold large fixed-income portfolios to counterbalance their liabilities. In the short-term they all should receive a boost from rising bond prices in the region as yields fall, but over the long-term they can face a headwind as low yields pressure their returns. That concern is still likely at least a year away from materializing, though the large bank exposure should mute the impact on the portfolio.

The fund’s expense ratio is a relatively low 0.48 percent considering its broad international exposure and currently yields 1.54 percent and makes semiannual distributions.

With Europe’s financial sector set to catch a tailwind as the ECB resorts to unconventional measures to boost the region’s economy, iShares MSCI Europe Financials rates a buy up to 31.