Action in the Eurozone

Financial Planning

It is expected that the ECB (European Central Bank) is going to announce its plan to add €1 trillion into the eurozone economy to overcome the its ailing economy.

he idea is to reduce the cost of borrowing by QE (Quantitative Easing) or generating new money in order to pay off government debt. Therefore it is expected that government bonds worth up to €50bn (£38bn) per month until the end of 2016 could be purchased by ECB. This is double the amount previously expected.

Government bonds are to be used because countries use government debt as an important way to raise money. Furthermore, government bonds are held by insurance companies, banks, pension funds and private investors.

Since the ECB is looking for ways to encourage spending and the eurozone is lagging behind. Therefore, reducing the cost of borrowing should encourage banks to lend and consumers and business in the eurozone to spend more. This has worked in the past in the US, which undertook a QE programme between 2008 and 2014. Similarly, Japan and the UK have also had bond-buying programmes.

Mario Draghi, the president of ECB in 2012 gave his famous ‘big bazooka’ speech, where he reassured his will to do anything to maintain financial stability in the eurozone. However until now the ECB has resisted. Furthermore, the Organisation for Economic Co-operation and Development (OECD) on Wednesday urged Mr Draghi to pursue uncapped quantitative easing.

The Eurozone was suffering deflation as evident from the figures earlier this month, creating a danger that growth would decline as consumers and businesses slow down spending and wait for prices to fall.

The 25-member policy-making board meeting will meet today and take the decision on the bond-buying programme which is likely to begin in March.

Germany has a large part to play in today’s meeting as they could object to the plan because they would not want any government bonds purchased to be held centrally by the ECB but rather by the national governments. QE would be beneficial to countries like Italy and Greece, because it will reduce their risk of default, which will be shouldered by the wealthier members of the eurozone.

How Quantitative Easing Works: