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Europe’s Central Bank Ends One of the Biggest Money-Printing Programs Ever

Frankfurt — One of the biggest money-printing programs of all time, a geyser of cash that may have prevented the collapse of the eurozone, will officially end in a few weeks in a slow-motion wrap-up that reflects lingering risks to the region.

The European Central Bank said on Thursday that at the end of December it would stop adding to its stock of government and corporate bonds, the so-called quantitative easing program it has used to hold down interest rates and encourage lending.

After a decade marked by recessions, financial crises and political turmoil that nearly tore the eurozone apart, the wind-down of the bond-buying program showed that the central bank was confident enough in the eurozone’s health to begin taking the region off life support. It was also a vindication of sorts.

Although not a surprise, the end to the stimulus program — or more precisely, the end of its expansion — was a milestone for the euro a few weeks before the currency marks its 20th birthday.

The decision by the central bank’s Governing Council in early 2015 to begin buying hundreds of billions of euros of government bonds was momentous at the time and also controversial. It generated legal challenges and friction within the council, which includes representatives from all 19 countries in the eurozone.

The program survived and ultimately changed forever the way that the European Central Bank fights crises, while bolstering its credibility.

Quantitative easing “is part now of the toolbox; it’s permanent,” Mario Draghi, the president of the European Central Bank, said Thursday. Previously, the European Central Bank was seen as lacking the firepower of the Federal Reserve Board. But now, Mr. Draghi said, the bank is “like other central banks in terms of the array of tools it can use.”

The move to end the nearly four-year effort was expected. The bank signaled in June that the bond-buying program, which pumped 2.5 trillion newly created euros, or $2.8 trillion, into the eurozone economy, would probably end in December. The central bank’s governing council affirmed the decision at a meeting on Thursday.

The central bank nonetheless appeared to have some doubts about the eurozone’s vitality. The sentiment is shared by many economists, and the central bank reassured investors on Thursday that the reduction to its bond holdings would be a calculated affair.

The bank said in a statement that, even though it would not increase its total holdings of government bonds after December, it would reinvest the money it gets when the bonds mature. It also pledged to keep reinvesting the principal even after it starts to raise interest rates from their current record lows.

That means an enormous stockpile of government bonds will remain in the central bank’s possession for years. The central bank emphasized on Thursday that it was in no hurry to reduce its holdings, and reiterated that it would not begin to raise interest rates before the end of next summer.

“The latest data and survey results have been weaker than expected,” Mr. Draghi said at a news conference. “This may suggest some slower growth momentum ahead.”

The eurozone is undoubtedly in better shape than it was when the central bank began the quantitative-easing program early in 2015 as some pundits were predicting the euro’s demise.

But in recent months, growth has slowed and risks have grown, including a rise in global trade tensions, tumult in Italy’s politics and the continuing chaos surrounding Britain’s plans to decouple from the European Union.

In one particularly ominous sign, Germany’s economy, which tends to set the pace for the eurozone, actually shrank slightly from July through September. Mr. Draghi highlighted some other risks Thursday, including jumpy financial markets and weakness in some emerging markets.

By reinvesting money from maturing bonds, the central bank will still be keeping a lid on market interest rates, or yields, said Carl Weinberg, chief international economist at High Frequency Economics in White Plains, N.Y.

“Yields will not go up because the E.C.B. has stopped buying new bonds, although downward pressure on interest rates will remain steady rather than increase every month,” Mr. Weinberg said in an email. “The excess liquidity remains in the banking system as long as the E.C.B. keeps its bond holdings steady.”

Before the program began, some experts had said that quantitative easing couldn’t be done in the eurozone. The eurozone is not a government and does not issue bonds. There was no form of pan-regional debt comparable to the U.S. Treasury bonds that the Federal Reserve bought as part of its emergency stimulus program.

The European Central Bank solved that problem by buying bonds issued by its 19 member countries roughly in proportion to the size of their economies. It also bought bonds issued by eurozone corporations.

The program generated bitter criticism from some citizens and economists, particularly in Germany, who saw it as a de facto bailout of countries like Italy and Spain that, they said, should have been forced to solve their own problems. Critics also argued that the central bank was effectively providing financing to governments in violation of European Union law.

But the program withstood legal challenges, making it easier for the central bank to use quantitative easing in the future.

Mr. Draghi declined to specify what it would take for the European Central Bank to ramp up bond purchases again.

A debate percolates among economists whether the bond-buying program did any good.

Holger Schmieding, chief economist at Berenberg, a German bank, said he believed the main effect was psychological.

“I think it was more the announcement of the program — that the E.C.B. was doing something — than the program itself,” Mr. Schmieding said in Frankfurt this week. “It fueled a certain optimism.”

Mr. Draghi said Thursday that the program had indeed achieved its goal of pushing down market interest rates, and also made the eurozone banking system safer by increasing the value of bonds that banks had in their portfolios. At times during the eurozone crisis, “Q.E. has been the only driver of this recovery,” Mr. Draghi said.

But he acknowledged that its benefits were not spread evenly.

“It’s clear that not everybody participated in the benefits of the common currency,” he said. “We should find the reasons why.”

[Source: By Jack Ewing, The New York Times, Frankfurt, 13Dec18]

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