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E.C.B. Move Leaves Further Stimulus Up to Eurozone Politicians Eurozone Nations Face Stronger Pressures to Lift Economies
(about 2 hours later)
DAVOS, Switzerland — The European Central Bank deployed its most powerful weapon Thursday, saying that it would begin effectively printing money in a bid to jolt the eurozone out of an increasingly grave economic malaise. DAVOS, Switzerland — As the European Central Bank deploys its most powerful economic weapon, the onus for growth now lies with the 19 individual countries in the euro currency union, a fractious and highly political group.
While welcomed almost everywhere but Germany, the decision to begin buying 60 billion euros, or about $69.7 billion, a month of government bonds and other debt now puts the onus on fractious and unpopular leaders in many of the 19 countries in the euro currency union. The central bank’s plan calls for buying 60 billion euros, or about $69 billion, of government bonds and other debt each month. It is the kind of aggressive action that leaders in weaker eurozone countries have long wanted and that Germany has tried to block.
With the European Central Bank now stretched to the limits of its powers, any further economic stimulus steps would need to be by national leaders, if they deem it necessary to improve growth, reduce the bloc’s 11.5 percent unemployment rate and prevent a catastrophic decline of prices known as deflation. Syriza, the leftist party expected to win the Greek elections this weekend, on Thursday called the bond purchase program “an important decision which the next Greek government will use for the benefit of the country.”
Such steps would involve the sort of extensive government spending that many countries, including Germany, have been reluctant to pursue, hewing, instead, to a philosophy of budget discipline that has acquired the shorthand label of austerity. The German chancellor, Angela Merkel, on Thursday warned her peers not to waste the breathing space given them by the central bank. The central bank, though, is stretching the limits of its power with the bond-buying program. And if it is not enough to address what ails Europe, any further stimulus efforts would fall to national leaders.
“We should not become diverted from the fact that we as politicians need to put a framework for recovery in place,” Ms. Merkel said at the World Economic Forum in Davos, Switzerland, minutes before the European Central Bank announced its decision in Frankfurt. Such steps would involve the sort of extensive government spending that many countries, particularly Germany, have been reluctant to pursue, hewing instead to a philosophy of budget discipline known as austerity. The German chancellor, Angela Merkel, on Thursday warned her peers not to waste the breathing space given by the central bank’s stimulus.
In essence, the central bank would create new euros and use the money to buy assets on the market, largely government debt. The increased demand from the European Central Bank should raise bond prices and push down yields — reducing the borrowing costs of eurozone governments. If the tactic works, it would ripple through financial markets, pulling down the interest rates on other types of debt, like business loans. The increased borrowing that results would stimulate demand and help drive inflation. “We should not become diverted from the fact that we as politicians need to put a framework for recovery in place,” Ms. Merkel said at the World Economic Forum here in Davos, minutes before the European Central Bank announced its decision in Frankfurt.
The size of the planned bond purchases that the central bank announced on Thursday exceeded expectations. The plan calls for buying €60 billion in bonds a month through September 2016, or whenever the eurozone’s dangerously low inflation rekindles to a level deemed healthy by the central bank. That would amount to at least €1.1 trillion — equivalent to 12 percent of the eurozone’s gross domestic product, according to calculations by Morgan Stanley. The central bank’s plan, in part, is aimed at easing the burden on national governments by pumping at least €1.1 trillion into the system.
It is the kind of aggressive action that leaders in weaker eurozone countries have longed for and that Germany has tried to block. Syriza, the leftist party expected to win the Greek elections this weekend, on Thursday called the bond purchase program “an important decision which the next Greek government will use for the benefit of the country.” The increased demand from the European Central Bank should raise bond prices and push down yields. If the tactic, known as quantitative easing, works, it would ripple through financial markets, pulling down the interest rates on other types of debt, like business loans.
Besides making it cheaper for governments to borrow, the program could give governments a share of any profit the European Central Bank might make in interest or in re-selling the bonds later. As a further stimulus step, the European Central Bank 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.
The long-awaited program, known as quantitative easing, is meant to spur growth in the eurozone economy and to raise inflation to healthier levels. In December, inflation in 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 difficult to reverse. The increased borrowing should help drive inflation and growth in individual countries. The plan could also give governments a share of any profit the European Central Bank might make in interest or in reselling the bonds later.
But any relief that national leaders feel might be clouded by the realization that Thursday was probably the last time that the European Central Bank and its president, Mario Draghi, will be able to buy them more time.
Among the star economists gathered in Davos for the World Economic Forum, there was nearly universal agreement that the central bank’s quantitative easing — Q.E. for short — will be useful but not enough to fix the eurozone.
Quantitative easing programs have helped revive the economies of the United States and Britain. But the eurozone is not a single country. It is largely a matter of conjecture whether pushing down the interest rates on government debt and some other kinds of bonds in Spain, for example, would make it easier for a hard-pressed small business owner in Italy to get a loan.
“The way it’s transmitted is the key,” Anat R. Admati, a professor of economics at Stanford University, said in an interview at Davos. Central banks “don’t control what happens after they give the money,” she said. “They make money cheaper and hope it finds its way to the real economy.”
Lawrence H. Summers, a professor at Harvard University and former United States Treasury secretary, said during a Davos panel discussion that “it is a mistake to suppose that Q.E. is a panacea in Europe, or that it will be sufficient.”
In a compromise designed to appease Germans fearful that they will pick up the bill if other countries do not pay their debts, the European Central Bank will delegate some of the bond buying to national central banks, which will also assume some of the risk. Analysts said leaving some risk with individual countries could weaken the credibility of the program — making the European Central Bank appear to be something less than a lender of last resort.
Anticipating the criticism, Mr. Draghi said, “The singleness of monetary policy remains in place.”
Financial markets reacted favorably Thursday. The benchmark Euro Stoxx 50 index was up 1.6 percent, with financial firms’ shares rising. The German DAX index ended at a record high of 10,400 points. Bond yields in some eurozone countries hit new lows, including countries that might benefit the 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.
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.”
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.
Even if the central bank action does not reach Italian or Portuguese borrowers, it could still help.Even if the central bank action does not reach Italian or Portuguese borrowers, it could still help.
Mario Moretti Polegato, president of the Italian shoemaker Geox, said quantitative easing could help restore a sense of optimism. Many smaller Italian companies could get credit if they wanted it, he said, but they are too pessimistic about their business prospects to invest.Mario Moretti Polegato, president of the Italian shoemaker Geox, said quantitative easing could help restore a sense of optimism. Many smaller Italian companies could get credit if they wanted it, he said, but they are too pessimistic about their business prospects to invest.
“The E.C.B. move is not something that will replace what Italy needs to do,” Mr. Polegato said in an interview at Davos. But he added, “It’s a first step.”“The E.C.B. move is not something that will replace what Italy needs to do,” Mr. Polegato said in an interview at Davos. But he added, “It’s a first step.”
The European Central Bank has sometimes seemed like 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 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. Any relief that national leaders feel might be clouded by the realization that there is probably not much more the European Central Bank and its president, Mario Draghi, can do to stimulate the region’s economy.
Now that the European Central Bank is approaching the limit of its powers, eurozone leaders may feel more pressure to act. But most of the changes economists say are needed, such as loosening rules that make it harder for companies to fire unwanted workers, are unpopular with voters. On Thursday, Mr. Draghi once again emphasized that national governments need to step up their efforts to rekindle growth.
“It’s a difficult task,” Sigmar Gabriel, the German economics minister, said of economic reforms during a panel discussion. “Most governments that have gone through with it have lost the next elections. But there is no alternative." “It is crucial that structural reforms be implemented swiftly, credibly and effectively as this will not only increase the future sustainable growth of the euro area, but will also raise expectation of higher incomes and encourage firms to increase investment today and bring forward economic recovery,” Mr. Draghi said in a statement. “Fiscal policies should support the economic recovery.”
Quantitative easing programs have helped revive the economies of the United States and Britain. But the eurozone is not a single country. It is largely a matter of conjecture whether pushing down the interest rates on government debt and some other kinds of bonds in Spain, for example, would make it easier for a hard-pressed small business owner in Italy to get a loan.
“The way it’s transmitted is the key,” Anat R. Admati, a professor of economics at Stanford University, said in an interview in Davos. Central banks “don’t control what happens after they give the money,” she said. “They make money cheaper and hope it finds its way to the real economy.”
Lawrence H. Summers, a professor at Harvard University and former Treasury secretary, said during a Davos panel discussion that it was “a mistake to suppose that Q.E. is a panacea in Europe, or that it will be sufficient.”
In a compromise intended to appease Germans fearful that they will pick up the bill if other countries do not pay their debts, the European Central Bank will delegate some of the bond buying to national central banks, which will also assume some of the risk. Analysts said that leaving some risk with individual countries could weaken the credibility of the program.
Anticipating the criticism, Mr. Draghi said, “The singleness of monetary policy remains in place.”
The European Central Bank has sometimes seemed like the sole eurozone institution seeking to restore the economy, in the absence of government spending stimulus. Eurozone leaders may now feel more pressure to act. But most of the changes that economists say are needed, such as loosening rules that make it hard for companies to fire unwanted workers, are unpopular with voters.
“It’s a difficult task,” Sigmar Gabriel, the German economics minister, said of making economic reforms during a panel discussion. “Most governments that have gone through with it have lost the next elections. But there is no alternative.”