Will the European Central Bank turn to quantitative easing?

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Nov. 26 2019, Updated 2:07 p.m. ET

What has the ECB done so far to help the European economy?

In June, the ECB (European Central Bank) launched the TLRTO (Targeted Long-Term Refinancing Operation), which has a built-in incentive mechanism to encourage loans to firms. In a way, the ECB offered cheap, long-term loans to banks on condition that they lend the money on to companies.

This September, the ECB announced that it would launch programs to purchase outright high-quality asset-backed securities and covered bonds, which will provide market incentives for banks to originate more saleable securities, and thus more loans to collateralize them. The ECB looks at it as a way of stimulating the flow of credit to businesses.

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With the introduction of such credit easing measures, the ECB intends to revive lending and, thereby, growth and economic activity in the European economy. An uplift in economic activity in Europe bodes well for U.S. exchange-traded funds like the iShares MSCI EAFE (EFA), the iShares MSCI EMU (EZU), the iShares MSCI Germany Index Fund (EWG), the iShares MSCI Italy Index Fund (EWI) , and the Vanguard FTSE Europe ETF (VGK), which track European equities.

What next?

Mario Draghi, ECB chief, has also said the central bank is even open to the option of quantitative easing, or QE, if need be. Under QE, the central bank would buy large amounts of sovereign bonds to increase the amount of money in the financial system.

Will the ECB resort to QE?

Back in July 2012, Mario Draghi, chief of the European Central Bank (or ECB) had promised to do “whatever it takes” to save the euro.

While the ECB has already tried measures such as the TLRTO (Targeted Long-Term Refinancing Operation), and announced measures such as buying high-quality asset-backed securities and covered bonds recently, the European economy seems stalled with unemployment as high as 11.5% and inflation painfully low at 0.3% in September 2014.

Then, there’s the chance that the situation may get worse enough for Draghi and the ECB to resort to their last big stimulus weapon—the massive purchases of government bonds known as QE.

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