European Central Bank announces huge stimulus program
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The European Central Bank announced a quantitative easing program this morning. It will purchase $ 69 billion worth of investment grade sovereign bonds, more than economists initially expected, beginning in March and lasting until September 2016. Newslook
In its most aggressive move yet to rouse the listless eurozone economy, the European Central Bank agreed Thursday to buy 60 billion euros a month in bonds to hold down interest rates and pump cash into the banking system.
The purchases of government and additional private-sector bonds will begin in March and continue through at least September 2016, totaling about 1.1 trillion euros. That’s more than the 500 billion euros initially expected.
The program, called, quantitative easing, or QE, is aimed at holding down already low interest rates and filling bank coffers to spark more lending, juicing the economy. They’re also intended to further push down the euro, boosting European exports, and channel more investments into stocks to drive up markets.
The ECB finally pulled the trigger on QE after consumer prices in the region fell 0.2% last month. Persistent deflation can prompt consumers to put off purchases, triggering further price declines and recession.
“Inflation dynamics have continued to be weaker than expected,” ECB president Mario Draghi said at a news conference.
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The eurozone economy likely grew less than 1% last year, economists estimate, after emerging from recession in 2013.
Carl Weinberg, chief economist at High Frequency Economics, says the bond purchases help but “QE does not address the key problem faced by the euroland economy — an undercapitalized banking system. Until the banks are fixed and lending again, there cannot be any sustained or meaningful economic growth.”
Government bond purchases by the Federal Reserve have been credited with jump-starting the U.S. economy after the 2008 financial crisis. But it’s much thornier to carry it out in the fragmented eurozone with 19 member states.
Economically strong nations such as Germany have opposed the program, fearing that if struggling countries such as Spain and Italy defaulted on their bond payments, German taxpayers would get stuck with the bill.
For 20% of the bond purchases, the ECB agreed to share losses among eurozone nations. That strategy is backed by economists who fear interest rates in debt-racked countries will spike if they’re forced to absorb all the losses on their bonds.
But individual nations will have to bear losses for the remainder of the purchases in an apparent concession to Germany.
Other recent ECB measures to stimulate growth largely have been ineffective. They include offering cheap bank loans and making banks pay to park their money at the central bank to prod them to lend more.
Earlier Thursday ahead of the announcement, the ECB decided to leave benchmark interest rates, the cost of borrowing at the central bank, at 0.05%.
While the American economy saw resurgent expansion in the third quarter — growing 5% — the major European economies of Germany, France, Spain, Italy and others have seen little growth since the financial crisis first began in 2008.
Germany is frustrated at what it sees as spending profligacy as well as a lack of structural reforms in some southern European nations, such as Italy, Spain and Greece. It also harbors entrenched historical fears of inflation and has been reluctant to endorse monetary policy that could lead to rising prices.
German Chancellor Angela Merkel, speaking minutes before the ECB announcement, said the eurozone has its sovereign debt crisis somewhat under control, but more work needs to be done.
Germany has opposed the ECB’s stimulus package, but Merkel said austerity should not be pitted against stimulus. “It’s very rarely a black and white solution,” she said.
Regardless of the ECB decision, eurozone countries should continue to maintain fiscal policies that encourage growth beyond public money. “We need investment by the state, but we all need private investment,” Merkel said. “Reforms are well worth your while.”
The decision is further complicated by upcoming Greek elections this weekend. A recent report by the German magazine Der Spiegel suggested that if Greece’s hard-left Syriza party wins that election — it is currently leading in the polls — and demands major concessions on its debt payments, then Merkel would prefer to let Greece leave the eurozone in a so-called “Grexit.”
A few hours ahead of the announcement, Sigmar Gabriel, Germany’s federal minister for the economy, said on stage during the annual meeting of the World Economic Forum in Davos, Switzerland, that Germany had already undertaken structural reforms while France had simply increased its debts.
“Every nation has to have the courage to (undertake) such reforms and to speak clearly about them without making people afraid, ” he said.
Speaking at the same event in Davos — about the future of Europe — Finnish Prime Minister Alexander Stubb said that whatever the ECB decided to do on QE his country would accept with a smile.
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