ECB commences QE

ECB President Mario Draghi is famous for insisting in 2012 that he would do anything to save the euro. This comment calmed the markets and as a result little action was required, but it only succeeded in buying time for the Eurozone. As bank and money lending has slid inexorably towards zero, economic growth and inflation have followed. With interest rates close to, and in some cases below, zero, the ECB has resorted to Quantitative Easing (QE) as an attempt to address heightened risks of extended periods of low inflation that stood at -0.3% in February.

 

Draghi has said that he will buy more than €1trillion in assets by September, and has left the program open ended with room for extension in an attempt to raise inflation towards the Eurozone target of 2%. However, the extra cash flooding the economy has caused the euro to fall to a 12-year low against the dollar, supporting the region’s exporters. The program has met fierce competition from political leaders in Germany where they believe it may reduce pressure on European countries to reform their economies.

 

QE is a strategy that seems to have worked in the US, which undertook a large program between 2008 and 2014, but some economists question the long term impact. Some argue that inflation figures have been distorted by the fall in oil prices, and the extreme measure of QE should only have been used in a more serious deflationary stage. Whatever the opinion, the Eurozone has had a very mixed set of economic data recently, which has not hinted at any potential economic recovery. The ECB has, however, remained optimistic about economic recovery, now expecting Eurozone GDP to increase by 1.5% in 2015 and 1.9% in 2016.


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Reuters: Business News

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