Europe to print €1.1 trillion

Mario Draghi, the President of the European Central Bank, has just announced that the ECB will launch a programme of Quantitative Easing amounting to €60bn per month, starting in March, and continuing until September 2016. The bank will maintain its programme of QE, said Draghi, until there was a: “Sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates of 2 per cent.”

Low interest rates and weak economic performance in the Eurozone and Europe more generally have brought the ECB to this decision. The ECB cannot reduce its interest rates any further in order to stimulate demand, as they already stand at the zero bound. It therefore follows the Federal Reserve Bank and Bank of England in its plan to buy assets in the open market, which has the effect of injecting money into the banking system. As such the ECB is creating money, the central intention of QE.

The persistent threat of deflation, combined with weak demand, is the most alarming economic phenomenon to have arisen in the Eurozone in recent months and is the main target of this programme of QE.

Contrary to the assertions of some hopeful commentators, deflation of the sort experienced in the Eurozone is potentially very dangerous. As the experience of the Japanese economy in the 1990s showed, deflation, and the corresponding drop-off in demand, coincides with a general pattern of price declines. This decline in prices can help consumers in the short term, but can also lead to a decline in business revenues and so to higher unemployment. Deflation also increases the burden of debts, which increases strain on the financial system.

The policy announced today is intended to prevent precisely such an outcome.