The European Central Bank on Thursday said it will begin an unprecedented €1.14 trillion ($1.3 trillion) bond-buying program designed to kick-start the 19-nation euro zone economy and ward off prolonged deflation.
The much-anticipated “quantitative easing” – controversial in Europe as an example of U.S.-style loose monetary policy – opens a new era for the 15-year-old euro and comes over widespread opposition in Germany. Policymakers and central bankers in Europe’s largest economy had argued that the Frankfurt-based ECB was overstepping its authority.
In a nod to German objections, the European Central Bank president, Mario Draghi, said euro zone countries would only commonly share the risk of 20 percent of the government and private-sector bonds being purchased.
For its supporters, the ECB’s move is long overdue. It comes years after central banks in the United States, Britain and Japan took similar steps to revive their economies after the global financial crisis.
The remaining 80 percent of debt to be bought in the program will be purchased locally by each national central bank in the euro zone, and those countries will remain individually liable for those risks.
The olive branch from Mr. Draghi addresses German concerns that Europe's largest economy could be left holding the bag for the liabilities of other euro zone countries, such as Greece, which might default on their debts or eventually leave the common currency.
“I think the German concerns have been addressed adequately,” Lothar Hessler, a German economist at HSBC Trinkaus & Burkhardt in Düsseldorf, told Handelsblatt Global Edition. “Some 20 percent of the potential losses are shared; the rest remains a national responsibility.”
“The losses are not divided among all the countries, which is a concession to German objections,” Mr. Hessler said.
The ECB said it would buy as much as €1.14 trillion in government and private bonds issued in the countries in the euro zone, significantly more than the roughly €750 billion that most analysts had been expecting. Mr. Draghi said the ECB would buy €60 billion in bonds each month starting in March through September 2016. Analysts estimated that about €50 billion of this will come from euro zone governments.
Mr. Draghi also suggested the purchases could, if necessary, continue beyond September 2016. The purchases “will in any case 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 percent over the medium term,” he said in a statement to reporters at ECB headquarters in Frankfurt.
Analysts said Mr. Draghi’s olive branch in terms of risk sharing was probably a necessary compromise to push the larger – and open-ended – bond-buying program through the 25-member governing council, which has been sharply divided over the details of his plan.
“The hawks got this risk-sharing scheme and the doves got an open-ended program,” said Holger Sandte, chief economist of the Scandinavian bank Nordea. “I think it’s a good compromise given the conditions the ECB has to operate under.”
The euro dropped 0.8 percent after Mr. Draghi’s announcement, and continued to fall through the course of the day and was trading down 1.7 percent at $1.1417 at 6 p.m. CET.
Mr. Draghi did not disclose exactly how the bank’s governing council voted on the issue but said “a large majority” were in favor, so many that a formal vote was not needed.
The open divisions on the council herald a new era for the central bank, which in the past has strived to make its decisions unanimously, even if it hasn’t always achieved that goal.
This new reality was something that Mr. Draghi openly acknowledged, in a sign that Europe is moving toward a more confrontational style of central banking that is more along the lines of decisions taken by the U.S. Federal Reserve or the Bank of England.
“You will have to get used to these qualifiers: There will be either a majority or a large majority, or a consensus,” Mr. Draghi told reporters, “…or unanimity, yes,” he added, but only after being prompted by his deputy, Vitor Constancio.
For its supporters, the ECB’s move is long overdue and comes years after central banks in the United States, Britain and Japan took similar steps to revive their own economies in the aftermath of the global financial crisis. Growth in the United States, and to a lesser degree in Britain, has since revived, but remains weak in Japan.
Germany’s central bank, the Bundesbank, had opposed Mr. Draghi's quantitative easing program from the beginning, and has yet to comment on whether it would carry out the ECB’s plans.
Germany's financial overseers and some of the nation's top bankers, including Deutsche Bank co-Chief Executive Anshu Jain, have criticized the ECB's plans as unnecessary and damaging to Germany’s financial system and a salve to the struggling euro countries in southern Europe.
“The ECB is putting its independence on the line,” Georg Fahrenschon, the head of an association of savings and loans banks in Germany, said following the decision.
Many politicians have also voiced their objections, while several top economists have questioned both the necessity of the move and whether it will truly be effective.
But while some in Germany hope the Bundesbank will refuse to participate, outright defiance of the ECB is considered highly unlikely.
“You would really have a tear going right through the euro zone: It would mean an end to common monetary policy,” Matthias Kullas, an analyst at the Center for European Policy, a think-tank in southern Germany, told Handelsblatt Global Edition. “That would be the beginning of the end” for the currency zone, he added.
In fact, Mr. Draghi took pains to note that the ECB council was “unanimous” that its quantitative easing program was legal, even if there were “a few members” that didn’t agree that it was a good idea. His comments made clear that even Jens Weidmann, the Bundesbank’s president, was forced to admit the ECB was acting within its own mandate.
“It is significant that he (Mr. Draghi) got them to unanimously agree this is a policy tool that can be used. This is a victory for Mr. Draghi over Mr. Weidmann,” said Elwin de Groot, economist at Dutch bank Rabobank in Utrecht, the Netherlands.
Barring outright defiance, the Bundesbank has little choice but to go along with the ECB’s plans, whether it agrees with them or not. “I don’t see that there is any freedom for the Bundesbank,” said Carsten Brzeski, a senior economist based in Frankfurt with the German-Dutch bank ING-Diba.
In another nod to Germany’s concerns, Mr. Draghi argued that the ECB’s plan would be much more powerful if governments did their part to revive growth on the continent.
The ECB can “create the basis for growth, but for growth to pick up, you need investment and for investment, you need confidence and for confidence, you need structural reforms,” Mr. Draghi said. “It’s now up to the governments to implement these structural reforms...The more they do, the more effective will be our monetary policy. That’s absolutely essential.”
Handelsblatt Global Edition's Christopher Cermak is an editor who covers economics and finance, Gilbert Kreijger covers companies and markets. To contact the authors: [email protected], [email protected]