Home' Trinidad and Tobago Guardian : January 25th 2015 Contents JANUARY 25 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
Europe s central bank is making
its boldest attempt yet to revive
the continent s struggling
economy, in a major test of
whether the euro zone can
avoid a worsening crisis that
threatens the prospects of its people for a gen-
The European Central Bank on Thursday
made an open-ended commitment to printing
euros and buying government bonds, a pro-
gramme known as quantitative easing that
has helped other countries---including the
United States and Britain---recover more quickly
from the Great Recession.
The ECB s actions aim to achieve what its
previous approaches have not: ending Europe s
depression and reducing the euro zone s 11.5
per cent unemployment rate, which is almost
double that of the United States.
Indeed, the euro zone---a union of 19 nations
sharing a common currency---might still fall
into a third recession in six years. The biggest
fear is a Japan-style spiral of falling prices,
wages and spending.
Now, the question is whether Europe s strug-
gles will spill over into the United States, whose
economy is a rare bright light in a global slow-
down. Economists say the impact of Europe s
slump for now is minimal, although they warn
that it will hurt on the margins, especially in
industries that export to Europe.
The ECB s new round of quantitative easing
will pump about 60 billion euros, or US$69
billion, into financial markets per month, with
the aim of meeting a "below but close to 2.0
per cent" inflation target, ECB President Mario
Draghi said Thursday.
Though investors had expected some form
of quantitative easing for months, the size of
the programme---at least 1.1 trillion euros---
was surprisingly large, and markets welcomed
the news as a sign that the euro zone is capable
of taking aggressive steps in spite of opposition
from Germany, its most politically powerful
"One of the big dilemmas of the euro zone
(is that) it s far too complex, which makes
them not agile, not able to move quickly in
a crisis," said Nariman Behravesh, chief econ-
omist for IHS. "But this adds to the credibility
of the ECB."
By pumping money into the European sys-
tem, the central bank in theory will depreciate
the euro and lower the cost of borrowing,
stoking demand and making it easier for com-
panies to invest and hire.
But few expect such a powerful or direct
impact. Borrowing costs are already low across
the continent. Quantitative easing lets cor-
porations issue cheap bonds, but most Euro-
pean companies borrow from banks rather
than capital markets.
And monetary policy doesn t address
Europe s structural reforms, which have been
slow to come, particularly in countries such
as Italy and Spain, which are hampered by
weak labor markets. Some economists have
even voiced the concern that euro-zone growth
stemming from quantitative easing could dilute
the commitment to reforms.
If there s reason to be encouraged, it s that
printing money also helps cheapen the euro,
which fell Thursday to US$1.1334 against the
dollar, an 11-year low. The currency s depre-
ciation helps exporters, whose products become
cheaper overseas, and makes for pricier
imports; an inflationary boost.
"In general, we are mildly encouraged by
the ECB s announcement, but caution that it
is not a silver bullet, " Jay Bryson, a global
economist at Wells Fargo, wrote in a research
note. "That is, economic growth in the Euro-
zone likely will remain sluggish for the fore-
Shares in Europe and the United States
jumped on the central bank s decision, and
bond yields fell across Europe. Last week, in
anticipation of the quantitative easing
announcement, Switzerland abandoned its
policy of pegging its franc to the euro. The
franc soared 20 per cent.
The ECB said the bond-buying will last at
least until September 2016, when purchases
will total 1.1 trillion euros, but could continue
well beyond that, until there s a "sustained
adjustment in the path of inflation."
Some analysts said Thursday that the bond-
buying could continue for years, belatedly put-
ting the ECB on a path similar to that of the
Federal Reserve, which in 2008 began the first
of several long rounds of quantitative easing.
This kind of open-ended commitment was
a surprisingly strong one for an ECB Council
that has faced emphatic opposition to any sort
of governmental bond-buying from Germany
and other northern European nations, who
view it as little more than a back-door bailout
for the profligate countries whose economies
are most deeply in crisis.
To fight that perception, the European Cen-
tral Bank s programme is an unorthodox one.
The ECB will buy each country s bonds in
proportion to their economy s size. Meantime,
each country will bear most of the losses if
they do default. The ECB itself will be on the
hook only if some of the nongovernment bonds
it buys, which make up 20 per cent of the
total, go bust.
This reduced risk-sharing, some analysts
said, could still blunt some of the benefits of
quantitative easing. If investors start to dump
the bonds of a single country, yields will go
up, making that default more likely. But that
kind of panic will happen only if investors
sense that a country is in acute, rather than
The biggest question is whether the central
bank can convince people that prices really
will start rising, which would do much more
to get people spending and companies invest-
Growth rates in some euro-zone nations
are still negative. Much of the deflation fears
are driven by lower energy prices, but even
with energy removed from the equation, euro-
zone inflation was only 0.6 per cent at a annu-
alised rate in December. Draghi said Thursday
that inflation has proven "weaker than expect-
ed" and that meantime economic slack
The International Monetary Fund said this
month that Europe was suffering from weak
investment as inflation expectations "continued
to decline." Although quantitative easing will
provide a push, it could also be offset by weaker
demand abroad; notably in China and other
developing markets. The IMF projects Europe s
annual growth to be 1.2 per cent in 2015, com-
pared with 0.8 per cent growth in 2014 and
a 0.5 per cent contraction in 2013.
Investors had anticipated a smaller version
of quantitative easing, largely because Draghi
had been wrestling with resistance from Ger-
man members of the council.
Because of that, Draghi s announcement
amounted to a "display of power," said Justin
Wolfers, a senior fellow at the Peterson Institute
for International Economics and professor of
economics and public policy at the University
Draghi said there was a "large majority"
that supported the move.
"It was clear to Draghi as far as three or
four months ago that this was necessary,"
Wolfers said. "There was no reason to wait,
and you re leaving millions unemployed. And
letting the continent get deeper in a defla-
Euro zone developments will not be a major factor affecting
growth in the Asia Pacific, said Standard & Poor s sovereign
rating analyst Takahira Ogawa on Friday.
"The region has not been a big contributor of growth and
exports for East Asia or for Asia Pacific for many years already,"
Ogawa said in a webcast on Asia-Pacific 2015 sovereign rating
On India, Ogawa said economic growth and external balance
are likely to be impacted if domestic demand for gold rises
following the easing of import curbs.
India scrapped its gold import rules linked to exports in
November, taking comfort from a narrowing current account
deficit which however has not yet pushed up the demand for
the yellow metal sharply.
India s economic growth, which has been below 5.0 per
cent for two years, will not improve "significantly" despite
the sharp decline in global oil prices, Ogawa said.
ECB tries a
tactic to quell an
S&P: Euro zone growth not a major factor affecting Asia Pacific growth
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