The European Central Bank on Thursday launched its most aggressive effort to date to revive the region's ailing economy — a program to buy 1.1 trillion euros in government and private bonds starting in March. But experts question whether the bank's move alone will be sufficient to correct a flailing eurozone economy dragged down by sluggish growth and structural failures in many of its member nations.
The long-awaited bond-buying program, also called quantitative easing, was an emphatic statement of the willingness of the European Central Bank (ECB) to do all it can to rejuvenate the economy shared by the 19-nation euro currency alliance. And it showed the ECB's readiness to assert its independence from Germany, the eurozone's largest and most politically influential country, where critics have opposed the plan.
Years of anemic growth and sinking inflation have raised the specter of deflation in the eurozone, one the factors behind ECB President Mario Draghi decision to act. He indicated publicly in December that the scope of the bank's quantitative easing would be announced in late January.
The ECB said it would combine purchases of government bonds with an existing smaller program of private bond purchases, to total 60 billion euros a month through September 2016. All told, the program will amount to 1.1 trillion euros, or $1.16 trillion.
According to data released by Eurostat, the European Union’s statistical agency, the eurozone’s inflation rate in December slipped unexpectedly low to -0.2 percent, a fall of half a percentage point from the previous month.
The size of the program exceeded investors' expectations. Draghi pledged to keep it going until the central bank sees a "sustained adjustment" in lifting inflation above dangerously low levels — in other words, for as long as it takes, possibly beyond the September 2016 target.
By pumping new money into the eurozone's banking system, the ECB's bond purchases are intended to make loans cheaper and easier to get so companies can invest, expand and hire.
Its success will, in large part, be determined by the performance of national economies within the eurozone, which have had wildly divergent fortunes since the start of the 2008 global financial crisis. Germany’s unemployment rate, for example, stands at a healthy 5 percent, according to EU data, while joblessness in Greece and Spain hovers near 25 percent, and eight other eurozone countries registering at least 10 percent. Those numbers spike when focused on youth unemployment, which surpasses 50 percent in Spain and Greece.
Many analysts believe that the ECB's bond buying program will not succeed without further action by national governments in the currency union.
“Rather than preventing fragmentation and dysfunction in financial markets, the bank is looking to deliver outcomes that actually depend on policy adjustments largely beyond the reach of its own tools,” wrote Mohamed A. El-Erian, chief economic adviser at Allianz SE, in the Financial Times. “When it comes to pro-growth structural reforms, a rebalancing of demand, combating excessive indebtedness, and completing an economic union among eurozone member countries, the ECB is dependent on political actors.”
Unlike the Federal Reserve in the United States, the ECB has been reluctant to enact, or unable to agree upon, steps to more forcefully expand the money supply. Those efforts by the Fed, which have held interest rates at near zero as part of a broader government bond-purchasing scheme, have resulted in more than $3 trillion entering the U.S. economy since 2008. The U.S. economy, while still subject to stagnating wages and underemployment, is now on a relatively stronger economic footing than that of Europe.
In addition to the challenge of governments with widely varied economic pictures and competing economic priorities, the eurozone lacks a common debt instrument. The Fed’s quantitative easing relied on U.S. treasury securities, common to all 50 U.S. states.
In comments at Davos, Switzerland, before the ECB announcement, German Chancellor Angela Merkel underlined the primacy of national governments. "Whatever decision the ECB makes, it must not distract from the fact that the actual impulses for growth from sensible conditions must be created, and can be created, by politicians," she said.
Draghi has faced opposition from two German members on the governing council of the ECB. German Bundesbank head Jens Weidmann has argued that bond purchases could stick German taxpayers with losses in case of default and has complained that the new stimulus would take pressure off governments, such as those of France and Italy, to ease regulations on hiring and firing and make their economies more business- and growth-friendly.
At the opposite end of the economic spectrum, Greece could soon exit the currency union altogether. Greeks will vote in national elections this weekend, in which Syriza, a leftist coalition, is leading in the polls. Syriza has campaigned against German-led bailouts that required painful budget cuts and austerity measures that many in Greece felt were too onerous. The coalition advocates renegotiating the terms of the bailouts, which could effectively lead to a Greek exit.
Economists noted that Draghi had said only 20 percent of purchases would be the responsibility of the ECB. This means the bulk of any potential losses, should a eurozone government default on its debt, would fall on national central banks. Critics say this casts doubt over the unity of the eurozone and its principle of solidarity, and countries with already high debts could find themselves in yet deeper water.
Al Jazeera and wire services. With additional reporting by Tom Kutsch