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12/03 – ECB’s QE Programme hits Euro X rate

Today’s European and US media widely report on the ECB’s quantitative easing (QE) programme. Since its launching on Monday, a scarcity effect has been observed on markets, reports Les Echos. A surge in stock markets has indeed been noticed, with the euro approaching parity with the dollar and interest rates decreasing a little more each day. In yesterday’s session, the CAC 40 index crossed the symbolic 5,000 points, something not seen since May 2008.

A lot of media – such as The Guardian –say that the euro lost more than 1% against the dollar yesterday, in what one analyst called the “most rapid and protracted” fall since the euro was founded in 1999. De Tijd quotes the conclusions of many experts regarding the ECB’s measures: “The impact of the ECB’s bazooka is bigger than expected.” The long-term rate dropped in most euro area countries to reach a historic low. The question now is to know how far the euro rate will drop and how far the US will let the dollar rate increase.

Several media report about ECB President’s optimism on the central bank policy. Noting a fall in the Portuguese rate, Mario Draghi stressed yesterday that “this suggests that the QE may prevent euro area countries from risk-spreading”, as quoted – for instance – in Les Echos, Jornal de Economía and Tg1. “The ECB claims success for its growth policy as the euro continues to dive”, reads The Guardian. Mr Draghi noted that, even though Frankfurt is aware that the measure “may entail some financial stability risks, these risks are currently contained.” He further said that the slowdown in euro area growth had now reversed and that economic recovery would broaden and “hopefully strengthen”.

The WSJE says that Mr Draghi defended the ECB policy by saying that the strategy is used by central banks around the world. “Asset purchases are unconventional, but they are not unorthodox. In fact they are eminently orthodox,” he stressed. The ECB President also underlined that benefits were filtering down to consumers and businesses while protecting the rest of the euro area from the political turmoil in Greece, says INYT. Mr Draghi added that inflation is expected to be around the targeted 2% in the coming years, says Napi Gazdaság.

Mr Draghi also rejected criticism that the ECB should have acted more aggressively sooner, noting that the central bank took a number of easing steps last year, says another article of WSJE. In a negative tone, Guillaume Maujean writes in Les Echos’ editorial that the QE has “side effects” such as “creating financial instability” and that it “gives an illusion of prosperity by disconnecting the financial sphere from the reality.” According to him, if the euro area does not change the pace for growth and reforms, “some painful adjustments are feared in the future.”

German commentators continue to express criticism towards QE. Commenting on the weaker euro due to the bond purchases, Johannes Pennekamp expresses his concerns about a devalued euro, which economists describe as “doping for the economy.” He takes up the doping metaphor to highlight that real improvement would be better for the economy in the euro area than an “artificial stimulus.” In an ironic tone in Münchner Merkur, Georg Anastasiadis “praises” Mario Draghi’s achievement of weakening the euro’s value in an effort to salvage the “ruined” economies in France, Italy and other countries. Mr Anastasiadis contends that the “cheap euro” makes only a few richer, but many will be off poorer.

Along the same lines, chief strategist at Sberbank Martin Barto expresses his scepticism towards QE in Slovakia’s Hospodarske Noviny. According to him, the unwillingness to make changes only means protection of debtors, mainly the states, at the expense of savers including future pensioners. Taking into consideration the euro area’s economic structure and the financial sector, the QE policy has certain limits and can hardly boost economic growth.

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