Quantitative Easing

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Submitted By NiklasPersson
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Pages 3
Submit: QE a showcase of dysfunctional unity?
On January 22nd the European central bank’s governing council will take a historic leap towards fighting the continuing deflationary mindset among Europe. However, the long-awaited QE-programme comes with a large dose of compromise among its members.
After long drawn discussions ECB is finally making its move towards addressing the very objective it takes more seriously, ie, an inflation target of 2%. And it couldn’t have come any sooner. Last year inflation in the euro zone was negative with a deflationary spiral luring closely behind. By injecting more money into the economy Mario Draghi, ECB’s president, hopes to achieve spurring growth and inflation, much like what the programs have done in America and Britain. But more importantly, Mr. Draghi cannot implement policies on the same terms. Instead of dealing with just one central bank and one federal government, he has to take 19 into consideration.
A big-bond buying programme in a monetary union is very problematic, especially due to varying creditworthiness among its member countries, ranging from triple-A for Germany to junk for Greece. But the main issue that has been on the table of discussion is simply risk. Or more precisely, how risk-sharing among the members should be distributed, in case a country defaults on their debt. In other words, who has to open up their wallet the most.
The country that especially has been stalling the program is Germany, simply because they cannot come to terms with the ECB and Mr. Draghi. They fear that their taxpayers, including union members, will have to cover the future losses of the ECB. Since the Bundesbank normally would expect to shoulder a quarter of the losses incurred by the ECB, they have cause for concern.
What ECB eventually did is a compromise on both the policy adopted and the risk-sharing side. First of all,…...

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