The European Central Bank plans to buy government bonds in the hope of stimulating economic growth
Inflation in the Eurozone fell below zero in December, raising speculations that the European Union might be headed towards a deflationary period. In order to jumpstart the European economy, Mario Draghi, the president of the European Central Bank (ECB), announced today that the bank will start a quantitative easing (QE) program in which the bank plans to buy €60 billion ($69.7 billion) per month of government bonds from EU member countries.
Mr. Draghi said that the bond buying would last through September 2016, or “until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.” Given this time frame, the ECB expects to buy over €1 trillion ($1.14 trillion) in government bonds.
Critics of the new QE plan, especially those in Germany, worry that this new plan is a form of wealth transfer and are worried about how the countries will share the risk of one member state defaulting on its loans. Mr. Draghi acknowledged that these concerns were legitimate, but that the plan would preserve some risk sharing, reports the New York Times.
The ECB will hold responsibility for 20% of the purchases, meaning the bulk of any potential losses should a government default on its debt with be the responsibility of national central banks.
As part of the new plan, the ECB will not be able to buy more than 33% of any country’s outstanding bonds, nor more than 25% of any bond issue. The central bank will buy the bonds on the open market, allowing the market to set the price. The bank will also hold an equal status to other bond holders, rather than holding itself above other investors and expecting to be paid back first. The ECB hopes this move will help encourage more private investment.
Greece will be eligible for the program, but under special restrictions. Because the ECB and other European central banks already own more than the stipulated 33% of bonds issued by Greece, the ECB will wait until enough Greek bonds have matured to take the total below the 33% threshold.
Guntram Wolff, head of the Bruegel think tank, said the plan’s size was impressive. “But the ECB has given the signal … that its monetary policy is not a single one. That’s a bad signal to markets and a bad signal to everybody in the euro zone,” reports Reuters.
Karl-Ludwig Kley, chairman of German pharmaceutical and chemicals company Merck, said he did not believe that bond buying was the answer. “I do not see, because of these programs, consumers buying more. I do not see companies investing more.”
Financial markets reacted more favorably. The benchmark Euro Stoxx 50-stock index was up 1.6% on hopes that the bond buying will spur growth and lending. Bond yields in some Eurozone countries hit new lows, including countries that might benefit most from the central bank’s program. The yields on 10-year government bonds in Italy dropped to 1.56% and in Spain to 1.39%. The euro fell $0.01 against the dollar to $1.14, which could help European exporters.
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