E.C.B. Stimulus Calls for 60 Billion Euros in Monthly Bond-Buying
E.C.B. Announces Stimulus Plan
Mario Draghi, the European Central Bank
president, said Thursday that the governing council agreed to a
quantitative easing program that will see it buy up to 60 billion euros’
worth of bonds.
Video by Reuters on
Publish Date January 22, 2015.
Photo by Kai Pfaffenbach/Reuters.
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.
Market Reaction to the E.C.B.’s Announcement
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.”
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