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11/22/2024 07:54:12 am

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Mario Draghi Comes Up With Plan that May Actually Work

European Central Bank (ECB)

(Photo : REUTERS/Kai Pfaffenbach) European Central Bank (ECB) President Mario Draghi leaves after addressing an ECB news conference December 4, 2014, for the first time in the ECB's new 1.3 billion euro headquarters in Frankfurt.

European Central Bank (ECB) President Mario Draghi has pulled the proverbial rabbit out of a hat, as he dodged the quantitative easing (QE) disappointment and presented a plan that might actually work.

Draghi unveiled a plan valued at 1.14 trillion Euros or $1.3 trillion. When he presented it, it was welcomed by investors despite the concerns it made to critics. He also stressed that he promises to keep spending until there is a "sustained adjustment" in inflation. Ignazio Visco of Italy warns though that the program is an open-ended one.

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After 11 years, the euro has fallen to an all-time low. At the same time, Bonds rose after the arrival of a mode of stimulus that has been adopted by the rest of the world for years.

Draghi says that his plan will assist in returning inflation to the ECB's goal. All this while still paying attention to the concerns of Germany, who led the region's actions towards the financial crisis. In the long run, the program will be making monthly purchases of about 60 billion euros up until September 2016.

This will be comprised of 45 billion euros in investment-grade sovereign bonds, 5 billion euros in the debt of euro-area public agencies, and 10 billion euros under existing programs to buy asset-backed securities and covered bonds. Visco said though that if the project is not reaching its inflation targets, then it may run longer than expected.

However, given that the program was an open-ended and undecided one, it did not deter investors from giving the green signal on the program.

The ECB faces what Japan once did; a deflationary slump. For the past five years, it has focused on preventing the collapse of their currency through the means of interest rate-cuts, long-term bank loans, a clean-up of the bank system, and purchases of securitized debt.

Due to this, prosperous northern countries like Germany have been vocal about not supporting governments that spend a lot. Draghi's plan recognizes the concerns. In fact, it comes with the condition that most nations shoulder the risk themselves.

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