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Euro plummets as European Central Bank announces bond buying program

Can 60 billion euros a month turn Eurozone indicators positive? (Part 10 of 11)

(Continued from Part 9)

The ECB announces its 60 billion euro quantitative easing program

Recently, the European Court of Justice gave an interim ruling clearing the way for the European Central Bank’s (the ECB’s) proposed monetary easing measures for reviving the Eurozone. We covered this development in our series German yields turn negative as European Court of Justice supports QE.

Consequently, on January 22, Mario Draghi, chief of the European Central Bank, announced that the ECB would begin buying bonds worth 60 billion euros ($ 69.7 billion) a month. The quantitative easing (or QE) bond buying program is to last from March 2015 until September 2016. In aggregate, the ECB should end up purchasing over 1.1 trillion euros in assets.

Implications of the 60 billion euro rescue package for the Eurozone

The announcement comes in the wake of the Eurozone standing in deflation territory. In December 2014, inflation in the 19-member Eurozone fell into the negative territory, as we discussed in Part 5 of this series. A further decline in prices could have grave consequences for the economy, which is already facing prodigious unemployment levels (as we discussed in Part 4 of this series). Increased money supply should boost investment and spending in the economy, generating employment opportunities and aiding economic growth.

Overall growth in the Eurozone should spell good news for exchange-traded funds such as the Vanguard FTSE Europe ETF (VGK), the iShares MSCI EMU Index Fund (EZU), the iShares S&P Europe 350 Index Fund (IEV), the iShares MSCI EAFE (EFA), and the SPDR DJ EURO STOXX 50 ETF (FEZ). These funds invest in European stock markets.

What does a weaker euro mean to investors?

The announcement sent the US-Euro exchange rate further down to $ 1.1365 per euro, marking the lowest level in the last 11 years. With the money supply in the European economy set to increase at a rate of 60 billion euros ($ 69.7 billion) a month, the exchange rate should depreciate even further.

However, a weaker euro should be in the Eurozone’s best interest—and yours. Here’s how.

Increased money supply in the economy should boost business investment, which should translate to increased productivity, consumption, spending, and, consequently, growth. A weaker euro would help exports in the Eurozone since European goods will become cheaper relative to other currencies.

The next part of this series sheds some light on the world market reaction to the announcement of Europe’s stimulus package.

Continue to Part 11

Browse this series on Market Realist:

  • Part 1 – Why should you follow economic indicators for the Eurozone?
  • Part 2 – Declining investments restrain Eurozone growth
  • Part 3 – Eurozone industrial production is caught in a stagnant phase

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