ECB Executive Board Proposes Quantitative Easing


Well, the word is out.  The European Central Bank is moving to a program of quantitative easing, one similar to the efforts of quantitative easing put on by the Federal Reserve System in the United States.  The parameters seem to be that the ECB will purchase €50 billion, or around $58 billion, in government bonds per month for at least a year.

Please note: at the time this post is being written this information is only a proposal of the ECB’s executive board.  The executive board met on Tuesday and crafted this proposal, which will be presented Thursday to the entire 25-member governing council.  The plan could be changed after the council’s deliberations.

But, this is what everyone…or, at least most everyone…has been waiting for.  However, the idea is not universally supported, the Germans don’t seem to be very enthusiastic about the prospect.

The reason for the proposed plan is the economic slowdown that is being experienced by countries within the eurozone and the fact that in December 2014, the eurozone actually experienced deflation as prices decline by 0.2 percent, year-over-year.

As mentioned above, the call for the ECB to engage in a program of quantitative easing has been pretty universal…excluding Germany…and has grown in intensity over the last nine months of 2014 as the economies in the eurozone and eurozone prices tended to drop throughout the year.

In fact, in late February and early March as the weakness in Europe came to the attention of policymakers and discussion began concerning the need for additional efforts to stimulate economic growth.

Mario Draghi, the president of the ECB, attempted to contain the discussions and although he had stated that he would do whatever is necessary to support the eurozone and the Euro, he did not seem to be overly enthusiastic about an all-out program of quantitative easing.  He never seemed to be totally convinced that the three rounds of quantitative easing put on by the Federal Reserve System achieved much in the way of stimulating faster economic growth or of creating a faster increase in prices.

During this time, Mr. Draghi talked about the need for the value of the Euro against the US dollar to drop to at least $1.20.  He seemed to feel that if the value of the Euro dropped to this level or below that it would encourage exports from the eurozone and this would help to spur on economic growth and cause the disinflation being experienced to stop.

As a consequence, Mr. Draghi tried a couple of other approaches to accomplishing the goal of faster economic growth and getting the eurozone inflation rate up to the ECB’s target level of 2.0 percent.  In late spring, the ECB lowered some policy rates taking one such rate into negative territory.  In the early fall, the ECB instituted a program of buying some asset-backed securities, a program that was not very successful.

Even though little was actually done by Mr. Draghi and the ECB, market expectations continued to believe that Draghi would do exactly what he said he would do…that is, “do whatever it takes….”

Expectations continued to grow that if the economic statistics on growth and deflation did not improve that the ECB would finally move in late January 2015 to actually propose…and then implement a program of quantitative easing.  Well, the time has actually arrived.

The markets have certainly seemed to believe that something, sooner or later would actually have to be done…and actually would be done.

In terms of the state of the economy, the yield on the 10-year German bund, the bell-weather of European securities, began to fall in early March and has proceeded to decline throughout the year.  For example, on March 20 and March 21 of 2014, this yield was about 1.65 percent.  As more information on the state of economies in the eurozone began to indicate the weaknesses that existed the yield on this security began to decline, reflecting not only lower expected growth in the eurozone, but also lower rates of inflation.

By the middle of April, this rate of interest had declined to around 1.45 percent.  By the end of June, the yield was below 1.30 percent.  On August 22, the yield dropped below 1.00 percent.  On October 1 it hit 90 basis points, and on October 15, it dropped below 80 basis points for the first time.

On December 9, the yield dropped into the 60s and on January 2, 2015, the yield was all the way down to 50 basis points It has traded as low as 43 basis points.

Mr. Draghi’s goal for the value of the Euro moved parallel to the drop in the bund yield.  In the middle of March, the value of the Euro was around $1.39.  By the end of June, the price of the Euro was almost $1.36.  Early in September, just after a meeting by the ECB, the Euro dropped to a little over $1.29.  Just after the ECB meeting in October the value of the Euro dropped to around $1.25 for the first time.

In early December, the value fell to just over $1.22.  it dropped to $1.20 on January 2, and as word that the ECB might really act on quantitative easing at the January 22 meeting.  As momentum seemed to build the Euro continued to fall in value, dropping below $1.19 on January 6, below $1.18 on January 8, and below $1.17 on January 15.  On Tuesday January 20 the value of the Euro closed at $1.1549.

Financial markets seem to be prepared for the ECB to finally institute, and then execute, a program of quantitative easing.

But, what is going on with respect to the Euro is reflecting what is going on in many places across the globe.  Japan has still not got it’s economy going again.  Canada is worried about how slowly its economy is growing and on Wednesday January 20 Canada’s central bank cut its policy rate by a quarter of a point.  And, last week the Swiss central bank removed the cap on the price of its currency and the value of its currency immediately dropped.

About John Mason John MasonJohn has been the President and CEO of two publicly traded financial institutions and an Executive Vice President and CFO of a third. He has also spent time as an economist in the Federal Reserve System and worked for a cabinet secretary in Washington, D. C. In addition John taught in the Finance Department at the Wharton School of the University of Pennsylvania for ten years. He now currently has a column on the blog Seeking Alpha and is ranked number 3 in terms of readers on the economy. From this column, two books have been published this past year from earlier blog posts. John is active in the shadow banking world, the venture capital space, and in angel investing. Other than that John works with start ups and early stage organizations, for profit and not-for-profit.


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