The European Union’s Quantitative Easing Strategy

The introduction of the European Union, as well as a centralized currency called the Euro for a select group of countries called the Eurozone, has had mixed results for the European countries participating. It initially resulted in a stabilisation of trade in Europe, with countries benefiting from a lack of expenditure due to volatile exchange rates, but the refusal of Switzerland to join the Eurozone had a detrimental effect on the value of the Euro, as people from countries using the Euro that possessed a volatile political climate or high tax rates began funneling money into Switzerland. This practice ended up devaluing the Euro in front of the Swiss Franc.

Once the Swiss National Bank began purchasing Euros in order to offset the discrepancy between the values of the currencies, the Euro stabilized, and the inflow of Francs into Switzerland dried up somewhat. However, the final situation, despite being better than before, was still recognized as a slow descent into economic doom. Hence, the European Central Bank came up with a plan that would boost Europe’s struggling economies, thereby providing a stronger and more stable Euro for all of the members of the Eurozone.

This plan, a strategy rather, is called quantitative easing. It is essentially a stimulus package that shall be injected into the European economy over a period of nineteen months, although it can be argued that quantitative easing is not a stimulus package in the traditional sense. It is essentially a method being used by the European Central Bank to reduce the cost of borrowing Euros from banks across Europe. The European Central Bank will do this by purchasing sixty million Euros worth of government issued bonds every month for the next nineteen months. This is going to lower bond yields which will resultantly increase the price of the Euro as a currency. This quantitative easing might be extended to more than nineteen months if the European Central Banks target inflation, which lies at just below two percent inflation, has not been met within the predetermined period of time.

This strategy of quantitative easing has already begun yielding positive results in the European economy. Bond yields have begun to drop drastically, with yields on five year bonds in Germany even dipping into negative territory. This has resulted in a veritable deluge of new Euros, all of which result in economic prosperity for the Eurozone. The prices of European exports have begun to go down, something which is stimulating some major economic activity in the export powerhouses of Europe.

The only downside to this strategy of quantitative easing being applied by the European Central Bank is that it doesn’t seem to be helping Greece which is in the most dire need of economic support. This is due to the fact the Greece received a sizable bailout from the European Union, something which makes its bond yields far too high. The end result is that Greece will have to wallow in its situation for a while longer.