Europe’s QE: Better Late than Never?

January 23, 2015

The European Central Bank (ECB) announced Thursday it will begin a quantitative easing (QE) program in which it will buy €60 billion worth of assets a month. The program, which will commence in March and continue through September 2016, will purchase both government and private sector bonds as well as other institutional debt securities. This move comes after the U.S. and U.K. have ended their own QE programs following declining unemployment and modest GDP growth.

Though there are a wide variety of opinions on the effectiveness — and consequences — of QE, the ECB hopes it will be the economic jump start that many of the countries in the Eurozone desperately need. The most recent GDP growth for the region was 0.8%, while unemployment was 11.5%. Additionally, the latest IMF forecast gave the Euro Area a 38% chance of falling into another recession. But the most troubling issue for the Eurozone is its inflation rate, which fell to -0.2% in December. Deflation can make it more difficult to pay back debt, which is especially worrisome for countries such as Greece, Italy, and Spain that have debt exceeding 100% of GDP. If the ECB is successful in achieving its 2% target inflation, this, in theory, would lead to further devaluation of the Euro, which has already fallen over 17% against the U.S. dollar since the start of last year.

How QE will affect the different parts of the Eurozone is difficult to predict. Unlike other QE programs, this one spans multiple countries and banking systems, some of which are opposed to this monetary policy. Stronger economies, such as Germany, warn that this shouldn’t be used as a method to avoid structural reforms while others feel the move was long overdue. Either way, with the threat of a third recession since 2008 looming, Europe appears to be left with little choice.