ECB plans major eurozone investment

Frankfurt at night – ECB building on the left

The European Central Bank announced on Thursday (January 22) its quantitative easing programme to revive the European economy and prevent deflation in the eurozone, with plans to buy 60 billion euros in governments bonds per month, starting from March. This, according to the bank, will add liquidity to the EU economy. However, many have expressed doubts over whether the plan will be enough to tackle deflation.

The European Central Bank’s (ECB) asset-purchase plan, by combining private and public bond-buying programmes, will continue until the end of September 2016 and will be conducted until “we see a sustained adjustment in the path of inflation,” said ECB President Mario Draghi.

Draghi: Combined monthly purchases will be €60 billion, to be carried out at least until end-Sept 2016

— ECB (@ecb) January 22, 2015

During 18 months the ECB plan will so buy a total of 1.1 trillion euros both in governments and private bonds, this is seen as a historic measure undertaken in the EU economy.

Gavin Hewitt, Europe Editor for BBC News, stressed on the bigger amount which was not expected.

5 years into the euro zone crisis the ECB announces a €1.1 trillion quantitative easing programme to boost economy. Bolder than expected.

— Gavin Hewitt (@BBCGavinHewitt) January 22, 2015

Gianni Pittella, the President of the Social-Democrats Group in the European Parliament, welcomed this decision arguing that is a move into the right direction.

.@giannipittella "Draghi's 'whatever it takes' a reality. Unity & solidarity in Europe prevailed over national selfishness. Thanks Mario!"

— S&D Group (@TheProgressives) January 22, 2015

Risk of any losses will largely be put under EU national banks

Another important point of the ECB announcement concerned the risk-sharing with national central banks, and whether the latter should take part of the responsibility for the losses resulting from a restructuring of their national debts.

Draghi announced that “the risk of any losses would stay with national central banks for 80 percent of the bonds bought” and the ECB will take the other 20 percent.

Draghi stressed that is a key concession made after concerns and critics. He stated during the press conference “we wanted to mitigate concerns about potential unintended fiscal consequences.”

For instance, German Chancellor Angela Merkel had complained that bond purchases may spread losses from defaulting countries to taxpayers elsewhere.

Draghi stressed that risk-sharing was fundamental to the bond purchases and posed the following question during the press conference: “Do we want to abandon the principle of full risk-sharing?” He directly answered himself: “Absolutely not.”

However, the Social-Democrat Maria João Rodrigues, vice-chair of the Economic and Monetary Affairs Committee in the European Parliament, regrets the decision on risk-sharing: “This is a pity that only 20 percent of the additional asset purchases will be subject to risk-sharing at the level of the ECB and the rest will be left to national central banks. This sends a bad signal about Europe’s monetary union, which is supposed to be irreversible,” she stated after the ECB’s announcement.

Draghi remains confident

Mario Draghi stressed that this new scheme will be effective, will raise inflation and boost the economic outlook in the EU area.

However, Draghi stressed that “for investment you need confidence”. He explained that the governments should also work on boosting growth in the EU.

Draghi: MonPol can create basis for growth but it's up to governments and Commission to make sure growth actually takes place

— ECB (@ecb) January 22, 2015

Following the ECB’s announcements, Guy Verhofstadt, leader of the Liberal and Democrats Group in the European Parliament, reacted: “The ECB has stepped in again because European leaders have failed to adequately address the crisis. This intervention by the ECB should not lead to complacency. Quantitative easing is no silver bullet.”

We should preserve independence #ECB & remind governments to stick to promises on reforms & solidarity @GoulardSylvie http://t.co/ysgUXhfPv5

— ALDE Group (@ALDEgroup) January 22, 2015

Doubts about benefits of sovereign bond purchases

The European Trade Union Confederation (ETUC) also raised doubts about the positive impact of this plan on growth and jobs by the ECB.

In a statement, published ahead of the ECB’s announcement, ETUC confederal secretary Veronica Nilsson said that “the European Central Bank buying bonds is necessary, but will not be enough to stimulate growth or create jobs.”

#QE @ecb @V_Nilsson @etuc_ces Quantitative Easing is not enough to stimulate growth pic.twitter.com/sK1xVNETWT

— EUROPEAN TRADE UNION (@etuc_ces) January 22, 2015

For Nilsson, investment is the key point to revive the EU economy. “It is austerity that is making Europe stagnate. What is needed to get Europe’s economy moving again is investment at a level considerably higher than that proposed by European Commission President Juncker,” she said.

Markus Ferber, a German member of European Parliament (and guest of our U Talking to Me? debate this week) from the centre-right group European People’s Party (EPP), stressed that this bond-buying programme would be unconstitutional.

In fact, Germany had already challenged a European bond-buying scheme in the European Court of Justice (ECJ), arguing it goes beyond the ECB’s mandate.

But last Wednesday (January 14), an advocate general at the ECJ published a non-binding opinion that buying bonds would be in line with EU rules.

Eurosceptic think tank Open Europe believes that the ECB’s quantitative easing programme won’t have that much of an economic benefit, but instead generate legal and political costs. In addition, it believes that it won’t have the same result as in the UK and the US, where it has been previously implemented.

David Wessel, economic affairs journalist for the Wall Street Journal, retweeted Open Europe’s point of view on Wednesday (January 21).

.@OpenEurope makes the case that ECB QE in Europe won’t do much good. http://t.co/F3jdZp18vw

— David Wessel (@davidmwessel) January 21, 2015

• Author: Laeticia Markakis, Euranet Plus News Agency

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