The second day of the World Economic Forum in Davos, Switzerland was supposed to focus on the Internet and digital technologies. But all of that was swept away by events across the border, when the Frankfurt, Germany-based European Central Bank launched its first round of “quantitative easing.” CCTV’s Jack Barton reported this story from Davos.
European Central Bank\'s quantitative easing announcement dominates DavosThe second day of the World Economic Forum in Davos, Switzerland was supposed to focus on the Internet and digital technologies. But all of that was swept away by events across the border, when the Frankfurt, Germany-based European Central Bank launched its first round of "quantitative easing." CCTV's Jack Barton reported this story from Davos.
It was an historic and controversial moment for the European Central Bank as its chief announced the ECB would expand its bond-buying program to include government debt for the first time.
The quantitative easing program was announced after the Euro-zone officially tipped into deflation.
“Under this expanded program the combined monthly purchases of public and private sector securities will amount to 60 billion euros ($68 billion),” Mario Draghi, president of the ECB said.
The plan would lower government borrowing costs while injecting fresh money into banks, which should in theory lend it to businesses and consumers.
The move dominated discussions in Davos.
German chancellor Angela Merkel has long opposed quantitative easing by the ECB and told delegates there was already enough money in the system and that Europe’s real problem remained the slow pace of reforms.
“We should not become diverted from the fact that we as politicians need to put a framework for recovery in place,” Merkel said.
Merkel was not alone. The International Monetary Fund’s deputy managing director Min Zhu said that when it comes to economic growth, structural reforms were the only act on town.
But the ECB’s first foray into large-scale purchases of government debt also had plenty of supports, including Italy’s Prime Minister Matteo Renzi.
Renzi and others believe such stimulus is necessary in the Eurozone where growth is low, while unemployment and debt levels remain high.
The delegates did agree that the Eurozone’s troubles remained one of the biggest challenges to full global economic recovery.
Germany’s history with inflation one reason for mistrust of quantitative easing
Quantitative easing may be a clunky phrase but has proved very divisive. In Germany, it’s a very touchy subject that reaches back into one of the most traumatic episodes in its history. CCTV America’s Owen Fairclough reported the story from Washington, D.C.
Germany\'s history with inflation one reason for mistrust of quantitative easingQuantitative easing may be a clunky phrase but has proved very divisive. In Germany, it's a very touchy subject that reaches back into one of the most traumatic episodes in its history. CCTV America's Owen Fairclough reported the story from Washington, D.C.
Inflation destroyed Germany’s economy in the 1920s. The German government printed more money instead of raising taxes to finance its part in World War I. All that excess currency circulating around the financial system sent prices through the roof.
“Inflation had taken off so heavily that prices would basically double every four days and it came to an end in that farmers would no longer accept paper money for their goods,” Peter Sparding of German Marshall Fund of the United States said. “And there were food shortages. It came to such an end that paper money was actually worth less than wood or coal so people started burning money or used it to put on walls as wallpaper.”
The economic collapse partly contributed to the rise of Hitler. History still resonates today in Germany when quantitative easing and printing money are mentioned in the same breath.
“I think one of the reasons is that this hyperinflation was really dramatic especially for the middle class,” Sparding said. “There were a lot of people who went from a relatively easy middle class life to being impoverished because their life savings were worth nothing within a matter of a few days. The other factor is that Germany has a traditionally high savings rate so people in general are a bit more risk averse so inflation also impacts people more quickly than it might here.”
Germany’s Central Bank President also thinks cheaper oil prices are their own kind of stimulus, so there’s no need for quantitative easing.
In the U.S. quantitative easing doesn’t have the same historic stigma as it does in Germany and so far seems to have worked. The Federal Reserve put trillions of dollars into the economy and it is now doing better than any other advanced nation. Meanwhile, inflation has actually gone down slightly.
Europe will spend $68 billion a month until September 2016, pushing inflation back but not beyond, the optimum level of 2 percent.