The "Quantative Easing" (QE) system which Mario Draghi is using could become dangerous for the future of the EURO and for the EUROZONE ! His system envisages the mass printing of Banknotes and the mass creation of Credit, which is step one of QE !
Technically, in the Balance Sheet of the European Central Bank (ECB) the Banknotes and Credit Created will probably be booked in "current monetary assets" and as "unearned reserves" in a special Reserve account above the Current Liabilities and Provisions !
QE is not an unknown system ! It normally has the aim of smoothing temporary "shortages or surpluses" of money or credit over a forseeble, short period of time ! For many decades Bankers have used a similar system called "Over-night" contracts to balance their daily "exposure". Interest is payable/receivable on such very short-term "arrangements" !
It seems that Mario Draghi wants to buy "short or medium term loans" from banks at a rate of 60 Billion Euros a month over 18 months. The ultimate total amount could become "huge" !
The hope and intention is that the banks in turn will loan the money they receive, to Industry in their country, to "kick-start" the economy and reduce unemployment ! The profit for the ECB in doing this, is the interest income it receives on the loans until their maturity !
The danger lurking in the system for the EURO arises if Banks do not, or cannot, make the expected loans to Industry ! Everyone already knows that printing too much money, which then becomes "surplus to requirements", provokes inflation !
This is particularly true in the EUROZONE context because interest rates are purposely kept very low. To protect their interests, Citizens now prefer to buy durable assets rather than invest money in Financial loans or Bank accounts which pay little or no interest.
If inflation gets out of hand, Mario Draghi must reduce the amount of money in circulation. This is, in fact, the second QE principle ! In addition interest rates may also need to be increased !
If nothing is done, it is certain that operators on Financial Markets will sell their surplus EUROS. The direct consequence of that would be the depreciation in value of the EURO and an increase of inflation in the EUROZONE, due to more expensive imports.
During a short period only, the volume of exports would benefit from the lower cost of Euros; this benefit would then be cancelled by wage increases to cover rising living costs !
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