Quantitative easing for the euro will give the UK more spending power in Europe

Anna Sonny, 23 January 2015

While falling oil prices are good news for those buying fuel at the pumps, some economists fear that the slump in prices will keep dragging the eurozone towards deflation. Inflation in the eurozone is currently -0.2 per cent, compared with the European Central Bank’s target of 1.9 per cent. This is worrying; as prices keep falling, nobody spends – businesses delay decisions and consumers waits for prices to fall even further before they buy, which leads to a stagnant economy.

In order to combat this, the ECB has decided on a program of quantitative easing; the bank will create money electronically, €60bn a month to be exact, from this March until at least September 2016. This money will be used mainly to buy government bonds; this in turn will send interest rates down, encouraging more borrowing and subsequently more spending, which is hoped will boost the economy.

But the markets will be watching Greece’s elections nervously this Sunday. Left-wing party Syriza is leading in the polls, and party leader Alexis Tsipras wants to restructure Greece’s debt repayments – this has heightened fears over the country defaulting on its debt and leaving the euro, and possibly the EU itself. Greece has actually been ruled out of the QE program until at least July as it needs to complete its bailout review and the ECB will not hold more than 33% of all bonds issued by any one government – and the bank has already bought the debt as part of the bailout packages. Syriza is promoting itself in its election campaign as Greece’s last chance. But its exclusion from the QE program under the ECB’s conditions means that the future of the Greek economy will depend very heavily on negotiations with the bank.

ECB chief Mario Draghi’s announcement of the QE program saw the pound climb to its strongest level in almost seven years against the euro. While the fall in the value of the euro will hopefully see a surge in its export market as the price of exports fall, conversely our exports to the eurozone will go up in price which could lead to a fall in demand; but at least the UK will see the benefits in cheaper holidays as a stronger pound gives us more spending power in eurozone member states. A trip to the Continent, anyone?