European Central Bank Plan to Rescue Eurozone Economy


After seeing the biggest swings in the markets since 2008, investors are not resting on their laurels as the highly anticipated decision on Quantitative Easing in the euro-zone may come today.

Analysts have been expecting and calling for QE in the euro zone since 2011, when it became clear help was needed to lift the struggling economy.

This week could be the week their prayers are answered.

Following in the footsteps of the US, UK and Japan, the ECB could decide in its meeting today (Thursday 22nd January) to start printing money. The ECB has won crucial backing after a top European Union Court official said there was no 'legal barrier in buying government bonds to bolster a listless euro-zone economy' as the ECB had pledged to do 'whatever it takes' to support the euro.

Germany may have a different opinion on risk-sharing which may outplay the law. They feel QE is not the right answer as they feel it will mean they are bailing out weak southern European governments by the back door. This has put the ECB under great scrutiny as analysts are criticising the central bank with the belief they may bow to Germany's pressure and violate the EU treaty. The answer will not be known until today's meeting, but it is widely feared that with so many restrictions to help risk sharing, QE may become ineffective.

The Effects of QE

Many feel that the ECB has a compelling case to start QE with the euro-zone already in deflation. Prices were at a 5-year low, with prices dropping around 0.2%, with further falls in countries such as Greece and Spain. Growth across the whole of Europe is seen to be vanishing.

If QE is started in Europe, the obvious change will first be seen in the strength of the Euro. Money printing has always seen a decrease in the value of the currency and the euro is not immune to this, A major sell off is expected with the euro.

Previous QE, in the US and Japan, have shown neighbouring nations benefit as investment outwards is seen to reap better rewards. In the US's case, emerging markets and commodities had seen a lot of volatility with highs being hit. Investors believe the case will be similar with Europe as there are no real investment opportunities in countries such as Italy, Greece or Portugal at the moment. The investments may head towards economies seen as safe havens such as the US and UK.

The US is seen to have the best investment chances with jobs being created at a high rate and the economy expanding in tangent. Growth is robust in the UK, jobs are being created and some believe the UK may increase interest rate to attract further foreign investment.

Effects of no QE

With big expectations of QE to be introduced, the bond market and surrounding economies have already seen the effects. The FTSE has been flirting around the 6640 and gold also finding strength as the meeting gets closer.

If QE is not introduced, analysts are expecting a huge sell off as European stocks have seen strong buying momentum recently, with Germany's Dax and the UK's FTSE 100 trading beyond 10,300 and 6,600 respectively.
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