Near the end of last month, the European Central Bank announced a plan to help pull the Euro Zone out of debt: indebting itself to the tune of roughly 60 billion euros each month. The scheme is a quantitative easing (QE) program that will last from March, 2015 until September, 2016. The ECB will be purchasing sovereign debt and then providing hundreds of billions in cheap loans to banks throughout the region. By the end of the announced buying season, over 1 trillion euros will have been shelled out for a last ditch QE effort. ECB vice president, Vitor Constancio, stated in a presentation at Cambridge on the matter that Europe’s main financial issues are centered on a lack in demand. The concept should help stave off poor inflation values throughout the currency union. By maintaining higher inflation rates, the Euro Zone should be able to avoid a serious, long-term depression, according to Constancio.

What will it do?

The intended result of quantitative easing is the increase inflation. Inflation can get a bad name among the general population, but most people confuse normal inflation with hyperinflation. Hyperinflation rates in the Germany from 1922 to 1923 have become the stuff of legend in economics. A 1 Mark loaf of bread in 1918 soon cost over 1,000,000,000 Marks by the end of 1923. What once required a transaction of a single coin for a single item now required bags full of money to take place, and the German economy at the time collapsed. Reasonable inflation rates are to be expected and are a sign of a healthy economy. To illustrate the relationship, the Euro Zone had a -0.2 percent inflation for 2014. This kind of negative inflation, or deflation, shows economists and investors that the Euro Zone countries are struggling severely. By allowing for more liquid investment in the region, the ECB is driving demand up in the Euro Zone and pumping up the inflation rate. This should, in turn, boost the economic growth within the member countries and position them better in the future.

Easing Tensions in Greece and Beyond

The most desperate countries of the Euro Zone will benefit most from this program. Wealthier countries will still be supporting the poorer ones, but the QE could help stabilize the crisis-ridden economies within the currency union and lead to more interdependence as those weaker economies recover. Greece needs the help it will receive from the EQ. Concerning this side of the stimulus plan, Constancio stated that no one country could veto funds reaching another. The assumed case is that Germany would take issue with Greece receiving relief, despite its inability to keep to its reform agenda. The popular concern in Germany of the new Greek government not keeping the current course toward solvency was no obstacle for the ECB’s QE program announcement.

It Worked Before

The QE program is no novel concept. The United States Federal Reserve began its own QE six years ago, and it appears have had the intended affect. The ECB is also no newcomer to the sovereign debt market. The bank purchased sovereign debt from Greece, Spain, and Italy from 2010-2012 to stave off potential economic collapses and each of those countries is still at surviving, at least in part due to those debt purchases. For the immediate future, this is a time for banks in member nations to get cheap loans and cheap capital can flow into these countries easily. It may be just the time to invest in major players within these markets, because FIAT (FCAU), Bosch, and similar Euro Zone-based companies could see significant increases in stock value as they use QE money to grow.