Financial markets praise ECB’s bond-buying move
Print Edition
INVESTORS and financial markets have hailed the European Central Bank’s latest monetary policy coup, but some observers warn that Europe might use up all its ammunition in the battle against deflation.
ECB chief Mario Draghi’s announcement on Thursday that the guardian of the euro would go on a 1.14-trillion-euro (US$1.27 trillion) bond-buying spree to drive up inflation in the eurozone sent global stock markets soaring and pulled down borrowing costs.
But there were skeptical voices, too.
“It is clear that this program is Draghi’s last cartridge. If the program fails, there will be no other measures to implement ... and the prospects for the eurozone’s economies will be terrifying,” said Laurent Bakhtari, analyst at Swiss-based IG Bank.
The bond-purchase program, known as quantitative easing, or QE, has already been used by the Bank of England and the US Federal Reserve to jump-start their economies.
The ECB has long wrangled over whether to follow suit, in part due to strong opposition to the measure in Germany.
Germany sees QE merely as sticking a plaster on weaker economies like Italy and Spain which, it argues, need instead to push through structural reforms to make them more competitive.
Germany is also concerned that, as Europe’s biggest economy and its effective paymaster, it would have to pick up the tab should another country default on its debt.
Draghi has already earned himself the nickname “Super Mario” for the way he has galvanized policy-setting at the ECB since taking its helm in 2011 and transformed it from the German central bank model it was originally based on.
Under his leadership — and in the face of unprecedented battles to save the euro — the ECB has repeatedly ventured into unchartered territory, by introducing negative interest rates, for example, or making vast amounts of cheap loans available to banks.
Heaviest artillery
But with eurozone economic growth still sluggish at a meager 0.2 percent in the last quarter of 2014, Draghi has been compelled to roll out a central bank’s heaviest artillery — the QE — and to design it in such a way as to make it palatable to the Germans.
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 job creation.
Under Draghi’s scheme, the ECB will buy 60 billion euros of bonds, both public and private sector, per month starting from March and lasting at least until September 2016.
Draghi himself insists that QE should not be seen as a cure-all to the eurozone’s ills and it is now up to the 19 governments of the euro countries to get their economies in order and their finances in shape.
“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.
Christine Lagarde, the head of the International Monetary Fund, agreed.
“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,” she said.
And German Chancellor Angela Merkel has insisted: “We should not become diverted from the fact that we, as politicians, need to put a framework for recovery in place. We are not out of the woods yet.”
The German business daily Handelsblatt slammed the ECB’s QE as “a dangerous experiment.”
Draghi “is reaching for the last tool that the central bank has at its disposal. But the success of this program, which critics in Germany have labeled the ‘nuclear weapon of monetary policy’ remains doubtful,” the newspaper wrote in a leader column.
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