Quantitative Easing in Eurozone to Start Soon?

ECB is scheduled to meet on the 22nd January and will introduction of QE be on its card to solve the deflation problem that has been haunting Euro area since in Dec 2014?  Data released last week showed that the 19-country single currency region had entered deflation territory in December. Prices in the euro zone fell 0.2 percent year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. The decline in prices has been largely attributed in the cost of oil, which has slipped over 60 percent since June 2014.

Eurozone Inflation (Chart curtersy of http://www.tradingeconomics.com)

Eurozone Inflation (Chart courtesy of http://www.tradingeconomics.com)

In order to raise inflation, it will be necessary to increase the money base again. An increase in the money base can be achieved by quantitative easing. The technically easiest way to implement QE consists in buying government bonds (sovereign-bond) in the secondary markets. The reason why this is technically the easiest way to implement QE is that the market for government bonds (sovereign-bond) is large and very liquid. As a result, it has been the standard approach in most central banks of the world.

Who is the biggest opponent of the QE in Eurozone? It is Germany of course! The most important argument used by the German opponents of a government bond buying programme by the ECB is that such a programme mixes monetary and fiscal policy. The argument goes as follows. When in the context of QE the ECB buys government bonds from fiscally weak countries it takes a credit risk. Some of these countries may default on their debt. This then will lead to losses for the ECB, which, in turn, means that the taxpayers of the fiscally sound member countries of the Eurozone (mainly Germany) will be forced to foot the bill. Thus, when the ECB buys government bonds, it creates a risk that future taxpayers will be liable to bear losses.

Will the QE be materialized soon in Eurozone? Lets wait and see.

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