In what might be its best and last chance to stimulate growth and ward off deflation across the eurozone, the European Central Bank (ECB) is scheduled to launch its long-awaited 1.1 trillion euro (US$1.2 trillion) quantitative easing program today.
The launch date was announced on Thursday by ECB President Mario Draghi, who confirmed the eurozone central bank would begin its program of buying about 60 billion euros of public and private bonds each month starting today — a policy it plans to apply until at least September next year.
The move comes as traditional efforts to boost sluggish economic activity in the 19-nation eurozone have been exhausted through rate cuts that have brought borrowing costs to nearly zero. The policy known as quantitative easing, or QE, is also being adopted as the eurozone faces growing threats of deflation, in which falling prices lead consumers to put off purchases in the expectation that they will drop further, sparking a damaging cycle of falling production, job creation and prices.
The strategy behind the ECB’s QE program is similar to that of earlier schemes introduced by the US Federal Reserve and the Bank of England to pump money into the economy with massive purchases of government bonds, aiming to foster easier credit and rising economic activity.
Under QE, a central bank creates money electronically and uses it to buy the debt that countries issue to pay their bills. That pushes down interest rates on bonds and other financial assets, making it cheaper for companies to borrow and invest, increasing spending and employment.
To bring that about, the ECB plans to snap up bonds issued by eurozone member states on secondary markets used by private banks, investment and pension funds, insurance companies and other major investors of sovereign debt.
However, the bond purchasing and risk exposure under the ECB’s controversial plan has involved a large dose of political massaging.
In an attempt to address stiff opposition to QE from Germany and several other northern European nations, the bulk of the debt security purchases under the scheme are to be made by national central banks.
And in another blow to the formerly-touted notion of debt mutualization, national central banks are to almost exclusively be buying bonds issued by their own governments — placating Germany, Europe’s paymaster, who will then be off the hook to bail out another country.
As the 18-month ECB program is poised to begin, some observers warn that US and British successes with QE do not guarantee it will be a surefire remedy for Europe.
“[We] doubt very much that the new policy will prompt a meaningful economic recovery or counter the threat of deflation as the ECB hopes,” a recent weekly report by Capital Economics Ltd said.
“There is still a large degree of slack in the labor market, despite recent falls in the number of unemployed and the business surveys remain consistent with only weak growth, raising the chances of a sustained bout of deflation,” the report said.
On the positive side, VTB Capital’s Neil MacKinnon said that “the credit cycle is turning up, admittedly from a low base, and the QE program might have some effect in promoting money supply growth.”
However, he added that “the ECB faces a number of economic challenges and monetary policy might only be able to fix some of them.”
Draghi has dismissed those kinds of doubts, and noted in his announcement on Thursday that markets have already reacted with some optimism to the approach of QE in Europe.
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