Mario Draghi put his money where his mouth is yesterday when he announced that he would pump 564.5 billion euros into the European economy in an effort to avoid deflation, keep the euro strong against the dollar and sustain thriving trade. The hard part is securing long-term economic growth in the region. The ECB approved a measure to cut interest rates to 0.15% and a 0.1% penalty on firms that deposit money in Germany.
Draghi announced that he is also going to buy debt. The measure will pump 164.5 billion euros into the economy. Up to this point, every time that the ECB bought debt from peripheral countries, the same amount was deposited in the markets and inflation was kept at bay. Now, the opposite is happening as prices are rising by nearly 2%. Draghi has been careful about the injections in an effort to avoid a cash shortage. Because when interest rates go up in the future, a cash shortage would be a big problem for the economy. But this situation won't affect the euro zone for a while even though the United Kingdom and soon the United States will be on this path. Draghi issued another core message yesterday when he told the banks to stop stockpiling cash and start lending money to companies.
To do that, the ECB will need to loan the banks around 400 billion euros, which will trickle into the private sector, and not penalize the banks that don't take funds. How this will help the real economy remains to be seen, but it looks like the banks are improving their situation enough to pass upcoming ECB stress tests in the fall.
