Aggressive ECB Stimulus Ushers In New Era for Europe
European Central Bank to Purchase €60 Billion in Assets Each Month Starting in March
By Brian Blackstone, Paul Hannon and Marcus Walker
Updated Jan. 22, 2015 10:57 p.m. ET
FRANKFURT—The European Central Bank ushered in a new era by launching an aggressive bond-buying program Thursday, shifting pressure to Europe’s political leaders to restore prosperity in one of the global economy’s biggest trouble spots.
Investors cheered the ECB’s commitment to flood the eurozone with more than €1 trillion ($1.16 trillion) in newly created money, sparking a rally in stock and bond markets and sending the euro plunging.
But in light of Europe’s underlying problems of stagnant growth, high debt and rigid labor markets, ECB President Mario Draghi suggested the central bank’s largess alone won’t be enough to right its economy.
“What monetary policy can do is create the basis for growth,” he said. “But for growth to pick up, you need investment; for investment, you need confidence; and for confidence, you need structural reform.”
The reactions to the central bank’s move rippled widely through the world’s trading floors, corporate boardrooms and European capitals. “It’s one piece of getting Europe back to growth, and we should see an impact,” Joe Jimenez, chief executive of drug giant Novartis said in an interview in Davos, Switzerland, where the political and economic elite are gathered for meetings of the World Economic Forum.
The effects also reverberated beyond the borders of the 19-member eurozone: Denmark on Thursday cut its main interest rate for the second time in a week, seeking to damp investor interest in its currency as investors sold the euro.
Mr. Draghi said the ECB will buy a total of €60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds. The purchases of government bonds and those issued by European institutions such as the European Investment Bank will start in March and are intended to run through to September 2016. Mr. Draghi signaled the purchases could extend further if the ECB isn’t meeting its inflation target of just below 2%. In December, consumer prices fell 0.2% in December on an annual basis in the eurozone, the first drop in over five years.
The ECB’s new stimulus “should strengthen demand, increase capacity utilization and support money and credit growth,” Mr. Draghi said.
He rejected any criticism that the vast expansion of the ECB’s easy-money policies would stoke inflation down the road, noting that inflation has stayed very low even after several interest-rate cuts and abundant ECB loans to banks. “There must be a statute of limitations for those who say there will be inflation,” he said.
In a nod to concerns in healthier euro countries over the prospect of assuming risks tied to their neighbors’ debts, the ECB said government bonds will be mostly purchased by national central banks and excluded from potential loss sharing. Credit risks associated with the bonds of European Union institutions will be shared, however. “We are not in a one-country setup,” Mr. Draghi said.
Some critics say that separating credit risks along national boundaries undermines the principle of one monetary policy for the whole eurozone, a charge Mr. Draghi rejected.
Under quantitative easing, central banks create new bank reserves to buy assets from financial institutions. Central banks get bonds, and banks get money that they can in turn use to extend new credit to households and businesses. Such expansionary monetary policies usually weaken an economy’s exchange rate, which boost exports. The euro weakened to 11-year lows after the ECB announcement as European bond prices rose.
Officials also kept their main lending rate unchanged at 0.05% and a separate rate on overnight bank deposits parked with the central bank at minus 0.2%, meaning banks must pay a fee to keep surplus funds at the ECB.
But the new ECB stimulus isn’t quite as large as the €60 billion figure suggests. The ECB included existing purchases of asset-backed securities and covered bonds under programs launched last year.
Excluding those facilities, the new bond buys amount to about €50 billion a month, analysts said.
The launching of quantitative easing, which investors and many European governments have been pleading for, won’t necessarily solve Europe’s problems.
Former U.S. Treasury Secretary Larry Summers described the ECB’s move as a “broadly responsible central bank action,” but said governments still need to make policy reforms. “I think we need to realize the era of central bank improvisation as the world’s principal growth strategy is coming to an end,” he said.
The biggest challenge for QE is whether it can break the economic stagnation that has gripped the eurozone in recent years, which has led to the crumbling of public confidence in Europe’s institutions and its political class.
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An anemic economic recovery since 2013 has left joblessness too high and output and inflation too low to escape the damage of the 2008 global financial crisis, which was compounded by the eurozone’s subsequent sovereign-debt crisis. Long after most other major economies have recovered from the financial crisis era, the eurozone remains burdened by high debts, bad loans, sickly banks, stressed households and anemic demand.
Stubbornly high unemployment rates in most eurozone countries apart from Germany have led to voter revolts against established political parties, fueling the rise of extreme or populist parties ranging from anticapitalist far-left to xenophobic far-right. Surveys show public trust in the EU and its bodies, including the ECB, has suffered too—although most voters across the eurozone remain firmly opposed to leaving the euro.
Not all members of the central bank’s governing council supported the decision to buy government bonds. Mr. Draghi said there was a large majority in favor of launching the program and unanimity that, in principle, buying government bonds is “a true monetary policy tool.” But some council members didn’t think it was necessary to buy bonds now. The ECB didn’t name opponents, but Germany’s two ECB council members have recently signaled their opposition to buying bonds.
Germany’s government is worried that the ECB’s move, by lifting growth and lowering borrowing costs, will take the pressure off eurozone governments to enact painful reforms.
“Now is the time to get our houses in order,” German Chancellor Angela Merkel said Thursday in a speech at Davos.
Despite those divisions, Thursday’s bond decision marks a new era for a central bank that was modeled on Germany’s conservative Bundesbank in the 1990s—at a time when fighting inflation was more of a priority than combating stagnation, weak consumer prices and recurring financial crises.
With official interest rates near zero and ample loans to banks failing to boost inflation so far, the ECB was left with few options apart from buying securities in the public debt market, thus raising the money supply. The ECB will cast a wide net for public debt, saying it would purchase securities with maturities ranging from two to 30 years. The ECB is also willing to buy bonds with a negative yield, which some short-dated German government bonds now have.
Central banks in the U.S., U.K. and Japan used quantitative easing extensively in the aftermath of the global financial crisis. While the Federal Reserve and Bank of England haven’t extended their programs amid solid growth and falling unemployment, Japan continues to deploy QE aggressively.
Still, many analysts question whether quantitative easing will work within Europe’s fragmented economy and banking system, particularly in stagnant economies such as France and Italy that have been slow to reform their labor markets to make them more flexible.
With Thursday’s move, which was more aggressive than financial markets had expected, Mr. Draghi passed the baton to governments to take the lead in restoring prosperity to the region’s economy.
Some business leaders shared the ECB chief’s assessment. “We have seen QE in the U.S. and Japan, but the key is structural reform. Without that it may not work and I see little sign (of structural reform) in key countries like France and Italy,” said Sir Martin Sorrell, chief executive of multinational advertising firm WPP.
The ECB’s move “was positive and it was needed,” said Francisco González, chairman of Spanish bank BBVA. He praised the slightly-larger-than-expected size of the ECB’s announced operation.
“Having said that, governments have to keep with reforms for the plan to meet its purpose,” he said.
—Gerard Baker, Khadeeja Safdar, Dennis Berman, David Enrich and Thorold Barker contributed to this article.
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