Europe’s central bank is making its boldest attempt yet to revive the continent’s struggling economy, in a major test of whether the euro zone can avoid a worsening crisis that threatens the prospects of its people for a generation.
The European Central Bank on Thursday made an open-ended commitment to printing euros and buying government bonds, a program known as quantitative easing that has helped other countries — including the United States and Britain — recover more quickly from the Great Recession.
The ECB’s actions aim to achieve what its previous approaches have not: ending Europe’s depression and reducing the euro zone’s 11.5 percent unemployment rate, which is almost double that of the United States.
Indeed, the euro zone — a union of 19 nations sharing a common currency — might still fall into a third recession in six years. The biggest fear is a Japan-style spiral of falling prices, wages and spending.
Now, the question is whether Europe’s struggles will spill over into the United States, whose economy is a rare bright light in a global slowdown. Economists say the impact of Europe’s slump for now is minimal, although they warn that it will hurt on the margins, especially in industries that export to Europe.
The ECB’s new round of quantitative easing will pump about 60 billion euros, or $69 billion, into financial markets per month, with the aim of meeting a “below but close to 2.0 percent” inflation target, ECB President Mario Draghi said Thursday.
Though investors had expected some form of quantitative easing for months, the size of the program — at least 1.1 trillion euros — was surprisingly large, and markets welcomed the news as a sign that the euro zone is capable of taking aggressive steps in spite of opposition from Germany, its most politically powerful member.
“One of the big dilemmas of the euro zone [is that] it’s far too complex, which makes them not agile, not able to move quickly in a crisis,” said Nariman Behravesh, chief economist for IHS. “But this adds to the credibility of the ECB.”
By pumping money into the European system, the central bank in theory will depreciate the euro and lower the cost of borrowing, stoking demand and making it easier for companies to invest and hire.
But few expect such a powerful or direct impact. Borrowing costs are already low across the continent. Quantitative easing lets corporations issue cheap bonds, but most European companies borrow from banks rather than capital markets.
And monetary policy doesn’t address Europe’s structural reforms, which have been slow to come, particularly in countries such as Italy and Spain, which are hampered by weak labor markets. Some economists have even voiced the concern that euro-zone growth stemming from quantitative easing could dilute the commitment to reforms.
If there’s reason to be encouraged, it’s that printing money also helps cheapen the euro, which fell Thursday to $1.1334 against the dollar, an 11-year low. The currency’s depreciation helps exporters, whose products become cheaper overseas, and makes for pricier imports — an inflationary boost.
“In general, we are mildly encouraged by the ECB’s announcement, but caution that it is not a ‘silver bullet,’ ” Jay Bryson, a global economist at Wells Fargo, wrote in a research note. “That is, economic growth in the Eurozone likely will remain sluggish for the foreseeable future.”
Shares in Europe and the United States jumped on the central bank’s decision, and bond yields fell across Europe. Last week, in anticipation of the quantitative easing announcement, Switzerland abandoned its policy of pegging its franc to the euro. The franc soared 20 percent.
The ECB said the bond-buying will last at least until September 2016, when purchases will total 1.1 trillion euros, but could continue well beyond that, until there’s a “sustained adjustment in the path of inflation.”
Some analysts said Thursday that the bond-buying could continue for years, belatedly putting the ECB on a path similar to that of the Federal Reserve, which in 2008 began the first of several long rounds of quantitative easing.
This kind of open-ended commitment was a surprisingly strong one for an ECB Council that has faced emphatic opposition to any sort of governmental bond-buying from Germany and other northern European nations, who view it as little more than a back-door bailout for the profligate countries whose economies are most deeply in crisis.
To fight that perception, the European Central Bank’s program is an unorthodox one. The ECB will buy each country’s bonds in proportion to their economy’s size. Meantime, each country will bear most of the losses if they do default. The ECB itself will be on the hook only if some of the nongovernment bonds it buys, which make up 20 percent of the total, go bust.
This reduced risk-sharing, some analysts said, could still blunt some of the benefits of quantitative easing. If investors start to dump the bonds of a single country, yields will go up, making that default more likely. But that kind of panic will happen only if investors sense that a country is in acute, rather than chronic, distress.
The biggest question is whether the central bank can convince people that prices really will start rising, which would do much more to get people spending and companies investing.
Growth rates in some euro-zone nations are still negative. Much of the deflation fears are driven by lower energy prices, but even with energy removed from the equation, euro-zone inflation was only 0.6 percent at a annualized rate in December. Draghi said Thursday that inflation has proven “weaker than expected” and that meantime economic slack “remains sizable.”
The International Monetary Fund said this month that Europe was suffering from weak investment as inflation expectations “continued to decline.” Although quantitative easing will provide a push, it could also be offset by weaker demand abroad — notably in China and other developing markets. The IMF projects Europe’s annual growth to be 1.2 percent in 2015, compared with 0.8 percent growth in 2014 and a 0.5 percent contraction in 2013.
Investors had anticipated a smaller version of quantitative easing, largely because Draghi had been wrestling with resistance from German members of the council.
Because of that, Draghi’s announcement amounted to a “display of power,” said Justin Wolfers, a senior fellow at the Peterson Institute for International Economics and professor of economics and public policy at the University of Michigan.
Draghi said there was a “large majority” that supported the move.
“It was clear to Draghi as far as three or four months ago that this was necessary,” Wolfers said. “There was no reason to wait, and you’re leaving millions unemployed. And letting the continent get deeper in a deflationary spiral.”