Is The ECB’s Plan to Stimulate Economic Growth Going to Work?

Is The ECB’s Plan to Stimulate Economic Growth Going to Work?

If you’ve been paying attention to economic news in the past week, you’ve noticed one big story all over the place. The ECB has announced that it will be purchasing 60 billion euros per month worth of both private and public sector debt in an effort to stimulate the economy. Now, the big question is, “Will the quantitative easing plan work?” Today, we’ll take a look at the plan set forth and how it should work, talk about what Mike Carney warns could happen, and why Germany’s opt-out could cause problems for the ECB’s stimulus plans.

How the Quantitative Easing Plan Should Work

Quantitative easing isn’t a new plan. As a matter of fact, the United States Federal Reserve and the Bank of England have both used the quantitative easing strategy to recover from financial crisis in the past. In the plan set forth by the ECB, the quantitative easing strategy will include the purchase of $60 billion euros per month in both private and public sector debt.

How Will This Help

In most basic terms, the ECB will be purchasing debt in an effort to funnel more money into the Eurozone economy. As a result of the debt purchases, lenders will have more money to provide loans to borrowers, borrowers will start spending; coupled with already low interest rates to keep investors interested, the mix of quantitative easing and low rates should fuel economic growth.

The Warning Mark Carney Has To Offer

Mark Carney is the Governor of the Bank of England; one of the few central banks that has experience dealing with quantitative easing. While Mark Carney does agree that quantitative easing can help stimulate growth, he also explained that the ECB should focus on the dangers as well. Carney stated…

“In an environment of low interest rates, and low interest rates for a period of time, and also quantitative easing, there can be excessive risk taking…What those monetary policies are looking to do is move from an environment of reticence to take risk to responsible risk-taking. We’re trying to avoid reckless risk-taking.”

The main concern here is that investors may see easy money and start getting reckless with their strategies. If this was to happen, sure we’d see economic growth, but at the end of the quantitative easing plan, these risks could lead to further economic issues.

How Germany May Cause Issues for the QE Plans

The Eurozone is an incredibly unique economy in the fact that the euro covers 19 different nations. This has always been a bit of an issue for me because I firmly believe that each country has their own interests with regard to economics and monetary policy. Therefore, what might work for one area of the Eurozone, may not work for the other 18. That seems to be exactly the case here. For the quantitative easing plan to be most effective, every member of the Eurozone must take part. After all, they are all under the same currency, and need to hold each other up. However, Angela Markel doesn’t believe that the move is good for Germany or the rest of the Eurozone. As a result, Germany has effectively decided to opt-out from comprehensive support for other EMU countries.

Final Thoughts

As I’ve said in the past, ever since I started paying close attention to the Eurozone, I’ve found it interesting that multiple countries can possibly grow successfully using only one currency. From my point of view, I just don’t think that a currency like that can last for the long run. Because the different countries may have different interests, as we are seeing in this case, trying to fix a problem in one area of the zone could cause issues elsewhere. With that said, I’m not sold on the fact that QE in the Eurozone will be the magic bullet that cures the problem. However, I do remain hopeful and optimistic.

By Invezz Newsdesk
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