Nerves set in as ECB unbottles policy genie

Fri Mar 13, 2015 8:54am EDT
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By Paul Carrel

FRANKFURT (Reuters) - For the first time in years, the European Central Bank is embarking on a policy course with a following wind. But already some officials are fretting that the gale they are unleashing may turn into a hurricane.

The concern is that the bond-buying plan launched on Monday to pump more than a trillion euros into the 19-country economy will send stronger members such as Germany that could arguably do without the support into overdrive, while fostering complacency among laggards.

The plan is aimed at lifting euro zone inflation from below zero back up toward the ECB's target of just under 2 percent. But the risk is that it inflates real estate and share price bubbles and might cause Europe's biggest economy, which already has record low unemployment of 6.5 percent, to overheat.

Such a scenario could widen the gap between rich and poor member states, further stretching the already strained fabric of European integration, tested again this week when Greece's finance minister accused the ECB of "asphyxiating" Athens.

On the face of it, the ECB is upbeat.

The central bank projects its plan to print money to buy sovereign bonds – so-called quantitative easing (QE) – will turbo-charge a frail euro zone recovery that is already being helped by lower oil prices and a revival in bank lending.

This is crucial. Had the ECB launched the plan last year when growth was stagnant and banks were reining in credit, the new money would have had a harder time finding its way into the economy - and the stimulus might have fallen flat.

"We did it just at the turning point," one senior euro zone central banker said of the QE launch, confident the plan can help buoy the economy and lift inflation.   Continued...

Inflated euro sign is seen outside the new headquarters of the European Central Bank (ECB) in Frankfurt, January 22, 2015. REUTERS/Kai Pfaffenbach