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27 January 2015

The ECB’s Quantitative Easing

Draghi, ECB

On 22 January 22, Mario Draghi announced that the ECB will engage in a long-awaited QE (quantitative easing) programme, starting on March 1st. The programme will build on the already running asset purchase programme and extend to purchases of bonds issued by euro area central governments, agencies and European institutions.

The combined monthly asset purchases are to reach 60bn euros. The programme was larger than expected and it will be open-ended: it will carry on until September 2016 and if necessary, it will continue until there are indications that the evolution of inflation is in line with achieving the ECB’s target of lower than but close to 2 per cent. The ratio of national bonds purchased will be set according to the capital key of the ECB (broadly speaking according to GDP weights).

There will be a risk sharing mechanism but only for 20% of any losses, 12 % of any losses on securities of European institutions and 8 % of any losses on other purchased assets. The rest 80 % of any losses will not be shared but instead borne by the National Central Banks.

Some special conditions were imposed for purchasing the bonds of the countries under bail-outs.

ETUI economist Sotiria Theodoropoulou said the following about the new QE programme: ‘This QE is a necessary but not sufficient condition for reigniting growth in the short to medium run in the Euro area. At the state that the Euro area economy is in, with low to negative inflation and interest rates close to zero, the effectiveness of monetary policy has yet to be firmly established. Instead what we would need would be a much more expansionary aggregate fiscal policy stance and a programme of public investment that would inject demand in the European economies while expanding their longer-term growth potential.’

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