In what some are calling Draghi’s last chance, the European Central Bank has launched quantitative easing – which will pump huge amounts of cash into the eurozone economy to try to get it growing again.
That money, freshly printed by the ECB, will be used to buy financial instruments called bonds, which are sold by governments, and companies, to raise funds.
Investors buy them, lending that cash for a fixed period, at the end of which they get it back, plus interest, though that’s not guaranteed.
By buying bonds, and getting money into the real economy the ECB also hopes to head off deflation – which is when prices fall and the economy stagnates as people put off purchases waiting for things to get cheaper.
At the moment those bonds are sat in high street banks’ vaults, waiting to mature, the ECB will buy 60 billion euros worth a month from March with the idea that the money freed up will be lent out to households and businesses who need loans.
The ECB pitched its bond-buying programme on the high side at 60 billion a month, going for what some analysts called the “shock and awe” effect.
Mark Haefele, Global Chief Investment Officer with UBS, told euronews: “The size was bigger than people anticipated, but more importantly it is open-ended, so the ECB can do more if they think it is necessary. And the other thing is that there is risk-sharing involved, so in some ways it is a historic announcement.”
Risk sharing means the central banks of eurozone members are on the hook for eighty percent of the value of the bonds if their governments default and do not pay back the money promised when the bonds mature.
German officials, including Finance Minister Wolfgang Schaeuble are not happy, fearing some eurozone governments now will not make essential economic reforms as the pressure will have been taken off them.
The theory is that the effects of QE will mean ordinary Europeans and the region’s businesses will be able to get loans more easily as the banks have more cash to lend.
That is what happened with quantitative easing in the United States, but so far QE has failed to significantly boost the Japanese economy
Plans to pump out more money also pushed down the value of the euro against other currencies which helps the region’s exporters.
But it all depends on the high street banks lending on the money they get from the European Central Bank for those bonds.
If they don’t do that confidence is not restored and the ECB’s plans will have failed.
If the “big bazooka” doesn’t work then the whole single currency experiment is at risk, which will be a massive problem for the region’s leaders.