After many months of argument and delay, Mario Draghi unleashed the might of the European Central Bank in a co-ordinated campaign to avert the threat of a deflationary trap in the euro zone and spur its moribund economy into life.

The long-awaited deployment of quantitative easing (QE) remains deeply controversial in Germany but Draghi had sufficient support among ECB governors to proceed. “There is little doubt – in our view at least – that one should act,” Draghi told a large gathering of reporters in Frankfurt.

The ECB will now print some €1.14 trillion in new money to buy government bonds from banks and other investors.

Starting next month, the ECB will spend €60 billion per month for 19 months on this initiative. Ireland stands to benefit to the tune of some €500 million per year, but it was not immediately clear whether this would be curtailed because of large bond holdings in the Irish Central Bank as a result of the deal two years ago to scrap the Anglo Irish Bank promissory note scheme.

Economic growth

The potential benefits throughout the euro zone work in four separate ways, but the overall aim is to kick-start both economic growth and inflation. Growth is already at a standstill in the single currency area and prices are dropping too, fanned by the falling price of oil.

The ECB is concerned that such trends, if left unchecked, could quickly result in a self-reinforcing deflationary spiral as prices continue falling because consumers postpone purchases in anticipation of further price dips. This would curtail growth, and add to the totality of euro zone debt.

QE is not without complexity or risk, yet such endeavours have been described as something akin to an emergency helicopter drop of money into the economy .

The first anticipated impact is known as “portfolio rebalancing”, the technical term for the process in which banks and other investors in government debt sell sovereign bonds they hold to the ECB and use the proceeds to fund new lending or investments elsewhere.

The second is the anticipation that the interest governments spend on bonds in issue will flow back into their treasuries by way of dividends from their national central banks, which will hold the bonds on behalf of the ECB. The new QE campaign – and the expectation that the ECB would go down this road has also led to bid declines in euro zone government borrowing costs on the open market.

The third impact is the expectation that the QE plan will push the euro’s value lower in currency markets, thereby making it easier for euro zone exporters to sell their goods outside the single currency area. This has already been in the euro’s valuation, which was already in decline in anticipation of a big QE move by the ECB. The single currency was at an 11-year low after Draghi unveiled the package.

The fourth is the signalling effect on inflation expectations. With prices in decline and official interest rates as close to zero as makes no difference, Draghi noted that real interest rates have risen even with the ECB rate at a record low.

As the ECB chief put it himself, the expectation of higher inflation would ultimately help to bring down real interest rates.

It remains to be seen whether all of this is sufficient to do the deed for the troubled euro zone. For one thing, serious anxiety remains that banks will simply refuse to lend on the proceeds from bond sales.

This stems from the weakened state of European banks generally, and the perception that many institutions would sooner conserve the money than lend it on.

While Draghi noted that banks must still pay the ECB for the safety of keeping money on deposit with it, some economists believe the ECB might have to follow this initial burst of QE with another before the benefit is seen.

Questions have also been asked of the merits of the ECB buying the bonds of Germany when its borrowing costs are negligible.

Euro area

Draghi’s response was to point to the borderless euro area, implying that the benefit would filter out from Germany. This, however, remains to be tested.

So too is the argument that the potential effectiveness of the QE programme will be blunted by the fact national central banks will be on the hook for any losses on 80 per cent of bonds acquired under the scheme.

The ECB will assume responsibility only for 20 per cent of any losses. Minister for Finance Michael Noonan, ranked among the many critics of this limited form of mutualisation, warned it would lessen the effectiveness of the plan.

However, Draghi made light of such concerns and argued they were overplayed.

The sense remains that this very factor was the price he needed to pay to avoid outright antagonism from the German faction in the ECB, which worries about central bank bailouts for errant governments.

In a nod to the presumed resistance of the two German members to the QE scheme, Draghi said a “large majority” of the ECB governors backed the initiative. Still, he made a point of noting that the meeting was unanimous in stating the asset purchase programme was a valid form of monetary policy intervention.

‘Policy tool’

“That’s important because it establishes the principle that this is a monetary policy tool that should be used in the right situations, but it is part of a tool box,” he said.

This is indeed crucial, for it signals that a figure as resolute as Bundesbank chief Jens Weidmann in his resistance to QE is not wholly impervious to the argument in favour of such interventions.

In Draghi’s account, indeed, the divisions were down to timing .

“There was a large majority on the need to trigger it now – and so large that we didn’t need to take a vote,” he said. Thus QE begins next month.

The next test is to ensure it works.