Last week, after much toing and froing, Mario Draghi, the president of the European Central Bank, announced the launch of a programme of quantitative easing. He must have wanted to choose the right timing for it, as last week there was also the World Economic Summit at Davos.

Although Draghi was not at Davos, he was certainly the talk of the town and managed to occupy the centre stage. His timing seemed even more perfect when one considers that he made his announcement while Angela Merkel was addressing the Davos meeting. The German Central Bank has expressed itself against quantitative easing.

Journalists have described Draghi’s decision as a bazooka. What it will entail is that the ECB will buy €60 billion a month of public debt and asset backed securities on the secondary market. This would be tantamount to printing this amount of money and unleashing it into the eurozone economy.

The aim is to try to steer inflation back to the ECB’s target of just below two per cent. Consumer price inflation is currently at -0.2 per cent. The package was bigger than markets expected, triggering a drop in the value of the euro even before any purchases had begun. In fact, bond buying will not begin until March and is targeted to end in September 2016.

There are several considerations to make about this decision. The first one is that quantitative easing on its own does not help the eurozone to emerge from the difficult economic situation. Any student of economics would tell you that a loose monetary policy can work only if the fundamentals of the economy are in the right place.

­­The issue is whether the governments in the eurozone adopt the right economic strategy and implement the necessary structural reforms to deliver long-term growth

There needs to be the appreciation that one of the causes of the economic situation that some of the countries in the eurozone are in, is the lack of investment. This lack of investment is the result of rigidities in their economy and the lack of any structural reforms. In effect quantitative easing will leave the desired effects only if this is followed and supported by reforms and a strengthening of the productive base.

The second consideration is the reaction of the banks. The additional liquidity being pumped into the eurozone by the ECB will make it more difficult for banks not to increase their lending.

On the other hand, if banks adopt the attitude that, no matter what, they remain not keen to lend to investors, quantitative easing will simply not work. Hence the reaction of the banks to the position taken by the ECB is critical.

The initial reaction of the financial markets has led to an increase in the value of equities, a lowering of the interest rate spread and a devaluation of the euro.

Up to a certain extent, this was the expected reaction. The devaluation of the euro will bring benefits only to those countries who export to other countries outside the eurozone.

Will a lower value of the euro encourage all countries in the eurozone to boost their exporting capability? For example exports of goods and services in Germany represent 46 per cent of the gross domestic product.

Exports of goods and services in France represent 28 per cent of the GDP. This would seem to indicate that the fall in the value of the euro would be of greater benefit to Germany than to France.

As I have already mentioned, the German Central Bank was opposed to quantitative easing.

The reason for this is that interest rates are likely to remain low. Low interest rates can seriously hurt pension funds which will see their income remaining subdued.

It could well be that Germany’s preoccupation with the funding of its health and social security system is much stronger than its preoccupation with the cyclical recession the eurozone is in.

One needs to keep in mind that both the UK and the US adopted a loose monetary policy in the last years. This has helped them to emerge from the economic recession and both countries are now reporting strong growth rates.

Thus the decision of the ECB to implement quantitative easing is the right one.

Could it be too little, too late, as some analysts have claimed? In my opinion the issue is not whether it is too little or too late.

The issue is whether the governments in the eurozone adopt the right economic strategy and implement the necessary structural reforms to deliver long-term growth, within the favourable scenario created by the European Central Bank.

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