The European Central Bank began 2015 with a bang Thursday, launching a massive trillion-euro bond purchase programme to ward off deflation and end stagnation in the eurozone economy.
After holding interest rates at their all-time low once again at its first policy meeting of the year, the bank said it would buy 60 billion euros ($69 billion) in private and public sector bonds per month.
Bank chief Mario Draghi explained that the aim was to stimulate the economy enough to drive eurozone inflation, which turned negative in December, back up to the ECB’s 2.0 percent target.
The extraordinary measures — known as quantitative easing or QE — Draghi said, will continue “until we see a sustained adjustment in the path of inflation.”
While QE has been used by other central banks around the world to jump-start their economies, the ECB has so far steered clear amid concerns it would overstep its mandate.
Critics, including the German government and its central bank the Bundesbank, complain that QE is a licence to print money to get governments out of debt and will lessen pressure for reform.
But Draghi said the bank’s 25-member governing council was “unanimous” that such a plan was a valid monetary policy tool.
And, he added, a “large majority” was in favour of taking such measures “now”.
Opponents of QE have also expressed concern that taxpayers in stronger economies such as Germany’s will have to foot the bill should any country default on its debt.
But the plan had been designed so that only 20 percent of the risk will be shared, with the rest shouldered by the national central banks of the countries concerned, Draghi said.
Economists are also divided as to whether quantitative easing can really work in a single currency bloc made up of 19 economies in very different states of health.
– ‘Not out of woods’ –
Critics worry the measure will take the pressure off governments to reform their economies and get their finances into shape.
Christine Lagarde, the head of the International Monetary Fund, said the QE programme will “strongly increase the prospects of the ECB achieving its price stability mandate.”
But she added, “It remains essential that the accommodative monetary stance is supported by comprehensive and timely policy actions in other areas, not least structural reforms to boost potential growth and ensure broad political support for demand management policies.”
At the World Economic Forum in Davos, German Chancellor Angela Merkel insisted “we should not become diverted from the fact that we as politicians need to put a framework for recovery in place.
“Europe continues to be confronted by great challenges. We have often talked about the debt crisis … we have this somewhat under control but we are not out of the woods yet,” she said.
Draghi, having won his battle with Merkel to begin quantitative easing in the first place, diplomatically took a similar line.
“Monetary policy can create a basis for growth but it’s up to governments and the EU Commission to make sure growth actually takes place,” he said.
Nevertheless, financial markets cheered the ECB plans.
European and US stocks rallied on the announcement while the euro sank sharply against the dollar.
“Once again, Draghi delivered,” said Berenberg Bank economist Christian Schulz.
Schulz said 60 billion euros per month represents 0.6 percent of eurozone GDP and thus smaller than the Japanese QE, but larger than any of the US Federal Reserve’s easing programmes.
This could have a positive impact on confidence and inflation expectations, he added.
– No silver bullet –
But Commerzbank economist Joerg Kraemer was more cautious.
“Private households and companies in many eurozone countries are still too much in debt, so they will hardly spend more on account of low interest rates,” he said, arguing the only impact will be to weaken the euro.
As a result, he concluded, “the move will hardly have much impact on the painfully slow recovery or on low inflation.”