E.C.B. Stimulus Calls for 60 Billion Euros in Monthly Bond-Buying
FRANKFURT — The European Central Bank said on Thursday that it would begin buying hundreds of billions of euros worth of government bonds in an aggressive — though some say belated — attempt to prevent the eurozone from becoming trapped in long-term economic stagnation.
The bank’s president, Mario Draghi, said the central bank would begin buying bonds worth 60 billion euros, or about $69.7 billion, a month. That is more spending than the €50 billion a month that many analysts had been expecting.
The long-awaited program, known as quantitative easing, is meant to spur growth in the listless eurozone economy and to raise inflation to healthier levels. In December, inflation in the 19 countries of the eurozone fell below zero and raised the specter of deflation, a sustained decline in prices that can lead to higher unemployment and that is notoriously difficult to reverse.
As a further stimulus step, the European Central Bank also said on Thursday that it was cutting the interest rate it charges on loans to commercial banks, as long as the banks commit to lending that money to companies or individuals. The new rate would be 0.05 percent, down from 0.15 percent.
“We believe the measures taken today will be effective,” Mr. Draghi said at a news conference.
Financial markets greeted the news favorably. The benchmark Euro Stoxx 50-stock index was up 1.6 percent, with financial firms’ shares among the gainers, 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 percent and in Spain to 1.39 percent.
The euro, which had already been near its lowest level in 11 years on expectations of action by the central bank, weakened further against the dollar, falling about 1 percent to around $1.14, a move that could help European exporters.
Top officials of the central bank had signaled clearly that a quantitative easing program was in the offing. But there remained, before the central bank meeting on Thursday, many questions about how large the program would be and whether it would be powerful enough to reverse a two-year decline in inflation.
The European Central Bank sometimes appears to be the sole eurozone institution seeking to restore the economy, in the absence of government spending stimulus. In contrast to the stronger recoveries of the United States and Britain, the bloc’s gross domestic product has still not regained its levels from before the onset of the financial crisis in 2007. Demand and credit demand remain feeble, and the unemployment rate has not dipped below 11 percent since early 2012.
And so the European Central Bank’s credibility is on the line. The policy announced on Thursday comes more than six years after the Federal Reserve undertook its first quantitative easing program in 2008. Indeed, in what has long been seen as a major blunder that worsened the problem, the European Central Bank actually raised interest rates in 2011.
Programs of quantitative easing by the Federal Reserve in the United States and by the Bank of England in Britain have helped the economies of those two countries recover from the global financial crisis more successfully than the eurozone has been able to.
If successful, quantitative easing would push down market interest rates in the eurozone and make it easier for businesses and consumers to borrow money, helping to stimulate the economy and restore inflation. Quantitative easing could also have a psychological impact, helping to raise expectations that inflation will begin to rise and thus encourage people to spend now rather than wait.
Mr. Draghi said Thursday that the bond buying would continue 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 percent over the medium term.”
The decision to begin buying government bonds on the open market came after a debate that lasted months. Mr. Draghi sought to overcome resistance from German members of the governing council and the broader German public, which regards quantitative easing as a form of wealth transfer to countries like Italy.
Mr. Draghi acknowledged on Thursday that there had been intense discussion by the bank’s Governing Council about how to share the risk if a country later defaults on its debt. Mr. Draghi said that concerns about risks being transferred from some countries to others was legitimate. The compromise preserves some risk sharing, he said.
Asked if the Governing Council had voted unanimously to enact the new policy, Mr. Draghi hedged. “The meeting was unanimous in stating that the asset-purchase program is a true monetary policy tool,” he said.
“There was a large majority on the need to use it now,” he added, such that “we didn’t need to take a vote.”
The European Central Bank will coordinate the buying, Mr. Draghi said, but will delegate some of it to the central banks of the various euro zone countries. In a further compromise, some of the risk from bond buying will be taken by the European Central Bank and some by national central banks.
Anticipating critics who might say that the European Central Bank is not in full control of the eurozone’s monetary policy if it shares the risk of its program, Mr. Draghi said, “The singleness of monetary policy remains in place.”
He said that the central bank would begin buying government bonds based on each country’s share of the central bank’s capital, which is commensurate with their population and gross domestic products.
He said that the central bank would not buy more than 33 percent of any country’s outstanding bonds, nor more than 25 percent of any bond issue. The central bank will buy the bonds on the open market, he said, to allow the market to set the price. Those conditions appear intended to address legal challenges to bond buying by the central bank.
Asked about Greece — a special case because of the political uncertainties there and because the country continues to labor under an international bailout program overseen in part by the European Central Bank — Mr. Draghi said that the bank could buy Greek bonds. But in practice, he noted, such purchases might be limited.
Greece, he said, would have to continue adhering to the terms of its bailout program, which is also being administered by the International Monetary Fund and the European Commission. That adherence is currently uncertain, as Greece awaits national elections this weekend that could result in a new government’s seeking to revise the terms of the bailout.
In addition, the European Central Bank already owns a large proportion of Greek bonds and would not hold more than 33 percent of the total. But in July, Mr. Draghi said, redemptions of Greek bonds could allow the central bank to buy more.
Greek politicians seized upon those statements for their own purposes.
Alexis Tsipras, the leader of the leftist party Syriza, has been a critic of the current government’s willingness to hew to austerity budgets required by the bailout program. In a statement, Syriza adopted a government-in-waiting stance, saying that the European Central Bank’s bond-buying plan was an “important decision, which the next Greek government will use for the benefit of the country.”
But in a televised address later on Thursday, the Greek prime minister, Antonis Samaras, noted that a review of Greece’s economic reforms by the country’s creditors must be completed if Greece is to be included in the Draghi bond-buying program.
Mr. Samaras ridiculed Syriza’s welcoming of Mr. Draghi’s announcement, saying the leftists, who oppose the terms of Greece’s loan program, “clearly do not know what’s going on.”
In another crucial provision of the European Central Bank’s program, the bank would have equal status to other bond holders — rather than holding itself above other investors and expecting to be paid back first in the event of problems. That will be important to private investors, because if the central bank held itself out as a privileged bondholder, effectively passing more risk on to other bond holders, other buyers might undermine the stimulus program by demanding higher interest rates.
Although the Federal Reserve and the Bank of England used quantitative easing to rejuvenate their economies, such a program would be more complicated in the eurozone. There is no widely traded, Pan-European government bond similar to United States Treasury securities, which were the main vehicle for the Fed’s program.
Another question is whether quantitative easing can help fix the eurozone economy, especially since it has taken so long for the central bank to begin a large-scale bond-buying program. Many economists and businesspeople are skeptical.
“I do not believe bond buying or whatever is the remedy,” Karl-Ludwig Kley, chairman of Merck, a German pharmaceutical and chemicals company that is separate from Merck & Company in the United States, said in an interview in Davos, Switzerland. “I do not see, because of these programs, consumers buying more. I do not see companies investing more.”