After months – no years – of waiting, Mario Draghi finally announced the European Central Bank is pushing the button on quantitative easing.
It comes roughly six years after the US and the UK embarked on their own versions of QE, and more than two-and-a-half years after Draghi vowed to do “whatever it takes” to save the euro.
Here is a quick summary of what we learned:
- The programme will involve purchases of €60bn a month, split between private and public sector assets
- Purchases will run from March to the end of September 2016, totalling €1.1tn
- There is however some ambiguity on the timing of the end of the scheme, given Draghi also said purchases would be “conducted 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% over the medium term”
- The governing council’s decision to start QE now was not unanimous
- The ECB won’t buy more than 25% of each issue of government debt, and not more than 33% of each issuers debt
- In a concession to Germany (long opponents of eurozone QE), Draghi promised that national central banks would bear most of the risk of their governments defaulting, with just 20% of the new bond-purchases subject to “risk-sharing”.
- The ECB has not ruled out buying Greek bonds, but said certain (unspecified) criteria would have to be met
- Draghi said QE would not be enough in itself to revive the eurozone economy – structural reforms at country level are also essential
- Markets have broadly welcomed the announcement
First reactions: 1 EUR=1.14 USD, German 2-year notes have a negative (-0.18%) yield, markets up reasonably, volatility spiked, gold up over $1300.
Methinks it’s a good thing for Europe, albeit way too late. But this is the right path (apart from the radical solution of abandoning the euro). Coupled with growth policies at the European and national level (such as more infrastructure spending in Germany, more structural reforms in places like France and Italy and Cyprus) and less austerity it may even have a chance to keep the Euro alive and kicking into the next decade. However I wouldn’t bet on it. So go USD!