Eurozone Joins The QE Party – Three Years Late

The European Central Bank (ECB) has at last won the go-ahead to pump- £835 billion into the ailing Eurozone economy.

After agonising since 2012, when bank president Mario Draghi promised he would do everything he could to support the flagging Eurozone, nothing happened.

Meanwhile, the British and US economies are thriving after bouts of quantitative easing that has arguably left the Eurozone in a worse economic position.

The ECB will buy Eurozone bank bonds worth around £45 billion a month until September.

The plan is buying the bonds creates more money in the economy and keeps interest rates low.

In turn, problems with borrowing ease and people are encouraged to spend their money because savings rates are so low.

Interest rates pegged

However, the first result of the announcement was to see the euro plummet to an 11 year low against the US dollar and also down against the Pound, which is good news for tourists planning a summer holiday in the Mediterranean.

Draghi also pegged interest rates at their 0.5% record low for another month.

Quantitative easing starts in March in the Eurozone, he said.

Infighting and squabbling between Eurozone members has kept the move on the backburner for almost a year.

The larger economies, such as France, Germany and Holland fear quantitative easing will damage their growth, but rapidly approaching deflation is even scarier for the politicians.

In December, growth in the Eurozone was -0.2% and the economy has slowly stagnated for years.

Draghi said the ECB wanted to “address heightened risks of too prolonged a period of low inflation”.

How QE works

Quantitative easing is often seen as a central bank printing money, although technically the term is incorrect.

What happens is the bank buys bonds from other banks, which boosts the value of their funds to lend.

Interest rates are kept down to encourage businesses and shoppers to borrow and spend, which puts more money into the economy and, in theory, boosts jobs and economic growth.

Economists are more doubtful about how this may work in the Eurozone, especially as January 35, 2015 sees an election in Greece which may lead to the nation pulling the plug on Eurozone membership.

Other countries have talked down the impact this may have on the Eurozone, but Greece owes significant debts after a bail-out and other nations who owe huge sums may follow suit if they see Greece escaping penalties for reneging on their repayment agreement.

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