Draghi’s top new year resolution: Quantitative Easing

Mario Draghi looks determined to apply Quantitative Easing in 2015, at the EP Committee on Economic and Monetary Affairs Monetary Dialogue, last November. Mario Draghi is the President of the European Central Bank (EP Audiovisual Services, 17/11/2014)

Mario Draghi looks determined to apply Quantitative Easing in 2015, at the EP Committee on Economic and Monetary Affairs Monetary Dialogue, last November. Mario Draghi is the President of the European Central Bank (EP Audiovisual Services, 17/11/2014)

The year 2014 is coming to an end and the major concern of the European Central Bank (ECB) and its president Mario Draghi was and still is the inflation rate that is way below the target of close but below 2%. The next monetary policy meeting of the ECB’s Governing Council will take place on the 22nd of January 2015 in Frankfurt and will be crucial for the implementation or not of the Quantitative Easing (QE), a programme that will prevent deflation in Europe.

ECB’s intervention so far

The Asset Backed Securities Purchase Programme (ABS PP) has started about a month ago and is supposed to help banks provide credit to the real economy.  Except for the ABS PP, a third Covered Bond Purchase Programme (CB PP 3) has already been put into action.

This programme is supposed to last for at least two years and involves the purchase of covered bonds which together with the other policy programmes intend to have a severe impact on the ECB’s balance sheet and boost the European economy with more liquidity.

However, the inflation is still very low and is reaching negative signs together with slowing growth and low consumer confidence. There is no time to wait and see if the aforementioned programmes are going to be successful and a full-scale QE is needed in order not to drop into negative inflation levels.

QE is a “must”

It is time to follow the example of other central banks such as one of the United States regarding its monetary policy. The Federal Reserve (FED) is using the QE programme for a long time to stimulate the economy by purchasing assets of longer maturity compared to short-term government bonds and thus lowering the longer-term interest rates. Thus, this programme is able to prevent deflation.

Will ECB follow QE in order to avoid deflation in the euro area? This is something that is in the mind of Mario Draghi who is trying to persuade other policy makers to vote in favour of this programme on January 22.

Weidemann’s opposition

Bundesbank president Jens Weidmann is against QE and characterizes it as risky, unnecessary and insecure. He was the economic advisor of the chancellor Angela Merkel in the period between 2006 and 2011 and was against the monetary transactions programme that Draghi introduced in September 2012 with the support of Merkel in order to save the Eurozone from a possible separation.

The chancellor took then the right decision and prevented the worse from coming to the Old Continent. Will she act equally wise and support Draghi in his attempt to implement QE in Europe or a new recession is about to come?

One thing is for sure. The full-scale QE is the last card that the ECB can play against inflation. ECB’S president needs to act quickly and cleverly in order to convince Germany and some of the members of the Governing Council of ECB who are against QE, in less than a month from now.

Let’s hope that the New Year will bring enlightenment to our European leaders and act for the good of the whole Continent.

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