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ECB Pledges To Stimulate Euro Economy

The president of the ECB, Mario Draghi, has suggested the possibility of a stimulus in the near future to help stimulate the Euro economy in response to the constantly declining ecoomic conditions. Since Draghi is already nearing the end of his term, this move could potentially tie the hands of his successor for years to come.

Today's difficult economic conditions have led the ECB to release negative interest rates. More recently, they have announced a new policy to begin buying bonds. Both of these tactics are being used to stimulate the slow-growing Eurozone economy, and to help it recover faster.

How This Decision Might Affect Other Countries

The ECB's most recent steps to stimulate the economy have been more extreme than expected. They could force the US and Japan, two major competitors of the Euro, to ease their financial policies as well. In fact, President Trump has already asked the FED to introduce a negative interest rate.

This point doesn’t guarantee that the Eurozone would be able to recover. With the US and China in a current trade war, the international economy is in an uncertain state. This has created some opposition to the suggested ECB bond repurchasing program. 

The ECB's moves to strengthen the economy by depreciating the Euro may impact other countries' fiscal policies. Donald Trump recently mentioned via twitter that the ECB's negative interest rate policy is hurting US exports due to the depreciation of the Euro vs the Dollar. Trump has directed the FED to introduce new policies to stop this from continuing, including lowering America's interest rates.

The Bond Purchasing Program

While everyone was already expecting Eurozone rates to be lowered further, resumption of the bond-buying program was met with some surprise. The Eurozone market is not sure whether rates will increase in the future, which means that this new bond-buying program would continue through the rest of Lagarde's term. Lagarde is Mario Draghi's successor. This move would prevent Lagarde from having her own say regarding this program, as its implementation would begin at the very end of Draghi's term.

Most of the ECB's policymakers initially opposed the bond purchasing proposal, however many have since changed their minds, and now it appears that Draghi has majority support. This is likely to be one of Draghi's last decisions while in office. After indirectly announcing these hard moves, the ECB brought down its growth projection to just 1%, which is even lower than what is considered to be the Eurozone's natural growth potential.

Is This Policy Effective?

When the interest rate falls below zero as indicated by the ECB’s president, all banks parking their funds with the ECB would then have to pay a certain amount of interest on their funds to leave them there. This could prove to be a dangerous move as all banks would be compelled to recover this penalty amount from its customers over the long run. But to prevent this disaster from happening, the ECB has also promised to resume the bond-buying program to help the economy a bit.

Moreover, the ECB has recently announced that it will introduce a multi-tier program to help the banks pay the lesser of this penalty amount if they park their funds for a longer period of time. This move could help save the European banks over $2 billion per year if they comply with the requirements. But many bankers still disagree with the structure of the program the ECB is going to launch.

All these decisions by Draghi would certainly suggest that the ECB is trying its best to help stabilize the Eurozone economy. Whether it will work in the long run remains to be seen.