It has been a long time coming, but European Central Bank (ECB) president Mario Draghi finally unveiled his quantitative easing plan and it was bigger-than-expected.
“The monthly purchases of public and private sector securities will amount to €60bn euros combined,” said Mr Draghi at a press call conference following ECB’s governing council meeting.
“They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation,” he added.
In real terms this means the package will total some €1.1 trillion.
How is he going about it?
Draghi plans to carry out asset purchases, including bonds issued by national governments and EU institutions such as the European Commission.
The main goal is to provide a big boost to the Eurozone’s flagging economy and to ward off the possibility of deflation.
The biggest victim of the Eurozone economy so far has been the single currency, which has dropped to a 7 year low on the pound, negating its massive 2008 gains seen in the wake of the Lehman Brothers. The euro is also now at an 11 year low against the dollar.
The noise from the market is one of positivity with Draghi’s plans offering much more clout than expected. Having an 18-month minimum run of QE demonstrates the ECB’s commitment to righting the ship. The sheer size of the plan is akin to those of the Federal Reserve and since that stimulus package hit the US markets, America’s economy has been looking relatively rosy.
Of course the German government isn’t very happy. They fear that by reducing the yield on sovereign bonds, Draghi’s QE will maker it cheaper for indebted Eurozone members such as France and Italy to borrow.
It all comes down to the sharing of risk. When buying sovereign bonds there are always potential losses to be wary of. Normally all Eurozone countries share this risk through their central banks, but Germany and the Netherlands have pushed hard for central banks to take on the responsibility for any losses arising from restructuring (or defaulting) on their own government debts.
Draghi argues that such a position would demonstrate less confidence in a monetary union, potentially undermining the QE in the first place.
So QE is finally here and it will be interesting to see its affects over the next 12 months, but there will certainly be a few bumps in the road, as one would expect.