Greek and Italian finance ministers on Saturday expressed opposing views on the effectiveness of the European Central Bank’s (ECB) quantitative-easing program with Greece’s Yanis Varoufakis urging an alternative plan to stimulate Europe’s economy.
Varoufakis said ECB President Mario Draghi’s 1.1 trillion euro (US$1.2 trillion) QE would fail to drive investment-led growth, just as his Italian counterpart, Pier Carlo Padoan, hailed the program as already being successful through a declining euro. Padoan said a weaker euro is in line with the single currency area’s long-term economic outlook and will boost Italy’s recovery this year.
While Greece is involved in negotiations with its EU partners amid concerns the country could run out of cash at any moment, Varoufakis suggested an “alternative” stimulus plan that entails issuing bonds linked to investment projects financed by the European Investment Bank.
Both finance ministers spoke at the Ambrosetti economic symposium in Cernobbio, Italy, where an ECB Governing Council member, Bank of Italy Governor Ignazio Visco, also took the floor.
“QE could prove both unsustainable and incapable of boosting private credit growth and investment in productive activities,” Varoufakis said. “Imagine an alternative plan to QE where the EIB will take its marching orders to lead an investment-led recovery for Europe. I’d like to call that the Merkel plan.”
The ECB sovereign quantitative-easing plan, which started today, entails purchasing 60 billion euros per month until September next year, for a total of 1.1 trillion euros. ECB Executive Board member Benoit Coeure said on Thursday that national banks bought 9.8 billion euros in the plan’s first three days.
So far, the ECB’s sovereign-debt purchases have pushed bond yields in the euro area to record lows and reinforced the euro’s year-long decline. The single currency depreciated 25 percent against the US dollar in the last 12 months.
“The euro is now approaching a long-term level which is more consistent with fundamentals,” Padoan said in an interview with Bloomberg TV at the Ambrosetti Forum on Saturday. “A weaker euro, a euro more in line with fundamentals, of course helps exporting firms in Italy.”
Analyzing the ECB bond-buying program, Visco said that while QE was justified in the light of the “deflation risk” in the region, its effects on the exchange rate and on the bond market have overshot expectations in the first week of the plan.
“It is beyond doubt that the strength of the exchange rate decline is larger than we had expected,” he said.
QE will lead to 1 percentage-point growth in aggregate demand, Visco said, citing a study by Bank of Italy staff.
It will also improve “the context for structural reforms” by reducing macroeconomic uncertainty, he added.
Padoan said that the favorable economic conditions created by QE and by the weaker euro, as well as by a slump in oil prices, should not be seen as an “incentive” to slacken the pace of reform in debt-laden Italy. The country’s economy contracted last year and unemployment rose to record highs. The weaker euro coupled with a slump in oil prices will lead to expansion in the first quarter, he said.
“I would expect positive growth in 2015 but this as far as I can go in terms of numbers,” Padoan said.
The euro decline “generates additional growth momentum which has to be strengthened by further measures so that investment and jobs begin to get strengthened in the country,” he said.
The ECB’s bond buying is scheduled to last at least until September next year, or until inflation is back on track toward the ECB’s goal of just below 2 percent. Prices in the region fell 0.3 percent last month.
“One of the reasons why QE is showing to be so effective is exactly the announcement of an 18-months duration with possibly open ended further measures,” Padoan said. “This initial reaction in terms of interest rates falling, expectations for inflation beginning to rise and a weaker euro will be consolidated if the QE program will stay where it is.”
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