European Central Bank Combats to Revive Economy

European Central Bank

The European Central Bank (ECB) combats an uphill battle, willing to pull no punches in order to maintain the euro as they decided to purchase bonds in a desperate effort to revive their failing economy. Europe’s leading judicial authority and the Swiss National Bank have created the path for quantitative easing (QE), but aggressive objection from German officials may handcuff the European Central Bank.

The question no longer revolves around the procuring of sovereign bonds, but how the agenda is carried out and if it can lead to ample resources. The biggest gamble stems from the fact that the financial institution has only handled euros these past five years, even with the QE strategy, could spook shareholders and ruin the bank’s reputation.

Word has spread about the European Central Bank President, Mario Draghi, meeting with German Chancellor Angela Merkel in solitude in hopes of discussing the potential constitutional blowback from the plan. The Bundesbank stands against the idea, viewing it as something an incompetent government would ever consider. The consequences for the strategy backfiring include producing more responsibilities for German citizens. If that were to happen, things would become problematic for Merkel, as well.

But before the plan can be put into action, internal splits may just stop Draghi and Merkel’s process in their tracks. The president of Bundesbank, Jens Weidmann, and Sabine Lautenschaeger, a board member for ECB, are almost positive to stand against the bond purchases. They may be alone, but with the magnitude of this issue, both sides will likely see their numbers increase as time goes on. A total of 500 billion euros can be purchased this month, but market reports suggest that twice as much is necessary to stabilize the economy.

Tips leaking from the European Central Bank say that if each of their branches were to help combat the weight of the purchase, the risks would be lowered, and the economy could be revived sooner. Guntram Wolff, director of a think-tank in Brussels, says that would effectively mark the European Central Bank as no longer being a solid financial firm.

Economists have theorized the two patterns in which EQ can be achieved, using the programs being utilized by Japan, Britain and the United States. The first pattern is called the portfolio effect. The second is dubbed the signaling effect. Basically, the second pattern, the signaling effect, sends a straightforward memo to the market that a steadfast financial institution is committed to use infinite resources to complete their objective. The first pattern, the portfolio effect, outlines the process that the bank funnels currency from their investors, who in turn apply the funds in high-risk stock that operate through currency that are not euros. The process decreases costs on bartering and causes the economy to hit inflation status.

In theory, and in some cases, practice, QE is a simplistic financial strategy. It has been employed by the U.S. Federal Reserve, which was key for restoring the American market. Britain used QE as well in a similar fashion. If the European Central Bank is to combat and revive their failing economy, they must act fast and as a unit. If ECB had been more attentive to the situation, or more aggressive, then Adalbert Winkler said they would have had a much easier time with their currency. ECB now has no one to interfere but their own internal members. Time and cooperation will determine the bank’s fate.

By Matthew Austin Bowers

Sources:
New York Times – 1
The Indian Express
New York Times – 2

Photo by Mike Chernucha – Flickr License

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