What is quantitative easing?
It is an unusual economy stimulating program when all other standard ways – like lowering of interest rates or negative deposit rates – failed. What happens with quantitative easing is that central bank buys financial assets from commercial banks or other state and private institutions. When unemployment rises, inflation is nowhere near and lower interest rates or negative deposit rates do not help either, the ECB finds itself in an unfortunate situation and starts quantitative easing. By putting money into circulation and lowering the interest rates the bank’s objective is to stimulate the economy. With lower interest rates the loans become cheaper. The cheaper the loans, the more accessible they are for more people who could fulfill their dreams earlier, dreams about a place to live, a car, a holiday…. Building new apartments, for example, puts money into circulation – and construction industry starts to flourish. Since we have not discovered perpetual motion yet, there is a downside to QE, and that is weaker Euro – although some countries profit from it: Germany, for example, manages to finance production very cheaply and then profits from export – lower proceeds from government bonds or debt increase.
Ben Bernanke vs Mario Draghi
In the past, the United States tried to boost the economy by quantitative easing. What was the reason? How did they approach their problems? Were the United States successful? The main reason was the American mortgage crisis that started the whole avalanche of negative events. In 2009, the unemployment in the United States reached the critical number of 8.5% – the highest since 1983. Markets were bleeding, people were losing their jobs and homes. With the world’s largest economy in this situation, Ben Bernanke opened Pandora’s box of quantitative easing during the financial crisis in 2007. And what is the result of his “risky” decision? Current unemployment is at 4.8% – the lowest in the past 8 years, the FED increased interest rates several times since then, the American indexes are breaking historic records and inflation is on 2.2% – all this can be considered the QE success.
What does the situation in the European Union look like? The economy was weakening in the last years – inflation was falling as well as prices and the unemployment increased. There were multiple reasons for it, among others the slump of the oil price by 75% or the never-ending help to bleeding Greece, which seems like an incurable patient on anabolic steroids. The ECB responded to the individual events with the objective to prevent the worst – deflation, it lowered interest rates to 0.05%, the deposit rate to -0.2% and then reached the minimum. Apparently, there was a different problem, since these steps were not sufficient and the situation was not getting better. The ECB President Mario Draghi waited too long, and after that standard monetary policy tools became ineffective, so in the end, he reached for an unconventional monetary policy tool called quantitative easing.
What is the ECB objective?
The objective of the ECB is to support the economy in the Eurozone, as well as watch the inflation. The ECB inflation objective is set just under 2% level, with current rate of 0.2%, according to the Statistical Office of the Slovak Republic (February 2017). The ECB decided on December 8th, 2016 to continue the QE program until December 2017 with 60bn Euro per month; our interest rates are at 0% and the deposit rate is -0.4%.
The choice is easy – we either use the same tool the FED had used that had helped the United States, or we can inactively wait and maybe we will end up even worse than Japan. You can answer this yourself.