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Since the financial crisis, the economic situation in the European Union has been stagnant. Years of low growth and low inflation have left the Eurozone seeking answers. In January 2015, the ECB sought to find these answers through a massive bond purchase program similar to the quantitative easing program that the Federal Reserve carried out in the United States. The plan entailed the creation of €1 Trillion, or approximately €60 billion per month, by September 2016 to carry out the purchase of bonds in Europe. This plan was put in place to push down interest rates, therefore boosting inflation and creating a more attractive environment for credit creation. In turn, this would effectively result in a stimulation of growth throughout the European economy.
Until recently, quantitative easing appeared to be effective in improving European conditions. Then things turned for the worst in emerging markets, most notably in China, and exports to those regions came in at lower figures than previously expected. This resulted in more recent economic underperformance in the Eurozone economy. Furthermore, lower energy prices and uncertainty about a rise in U.S. rates have helped to keep inflation well below its 2% target, at a current rate of only 0.2%. These events have led economists to make downward revisions for inflation and GDP growth for the years 2015 through 2017.
As a result of so much economic uncertainty and a loss of serious progress in the Eurozone, many have been speculating about an extension or expansion in the ECB’s bond buying program. Mario Draghi, President of the ECB, has not committed the ECB to further quantitative easing, but the ECB did recently increase the amount of an initial individual bond issue that it could purchase from 25% to 33%, possibly indicating future stimulus. Mario Draghi did speculate to whether the slowing conditions were transitory due to slowing emerging markets, or permanent stagnation, and noted that he expected Chinese officials to lay out economic plans at the G20 in Ankara, Turkey.
Overall, whether it is appropriate to beef up quantitative easing in the Eurozone will to some degree come down to the health of emerging market economies and their effect on the European economy.
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