In announcing a new round of extraordinary measures to support the euro-area recovery, the European Central Bank is sending three loud and unambiguous messages. Their implications extend well beyond Europe.

First, it is committed to experimenting even more with its use of unconventional monetary policy, including by taking the deposit rate even more negative and starting a program to purchase asset-backed securities.

Second, it is positioning itself for full-scale quantitative easing -- but on the condition that European governments show more flexibility on fiscal policy and put into place the structural reforms needed to support healthy growth.

Third, it isn't too worried about a multitrack world of central banking, in which its policy loosening contrasts with moves by the U.S. Federal Reserve, the other systemically important central bank, to remove monetary stimulus.

The ECB's moves come in the context of legitimate concerns about the momentum of Europe’s already-sluggish economic recovery. They are part of a broader policy framework with four main elements:

1. Force down bond yields and interest rates, hoping that this supports jobs and growth by restoring proper credit flow throughout the monetary union.
2. If this doesn't work fast enough, repeat with more aggressive use of bond purchases, hoping also to promote export growth by weakening the currency.
3. Pressure governments, both privately and publicly, to implement much-needed measures to promote growth and avert deflation.
4. In all this, hope that the costs and risks of experimental monetary policies don't overwhelm their benefits.

The success of the ECB's strategy, and its impact on the rest of the world, depend heavily on the extent to which European governments do their part. And the longer these governments dither, the greater the risks.

David Fuller's view

This is clearly a big monetary stimulus and Mario Draghi was considerably more outspoken in calling on EU governments to introduce policies which encourage GDP growth.  They have long heard this from every sensible financial commentator, to no effect, so how will they respond to Mr Draghi?  Favourably, I hope, although I would not bet on it.  Germany has yet to indicate that it will move away from its stance on euro-zone austerity.    

This column by Mark Gilbert: The Euro Is Draghi’s Only Friend, indicates the resistance that the ECB President is having to overcome.  However, for international investors and European multinational companies (Autonomies), the euro’s weakness is creating an opportunity.

This 10-year chart of EUR/USD is technically overextended in the short term.  However, given the ECB’s latest policies I think any rally would be unlikely to encounter resistance beneath the now declining 200-day (40-week) MA.  Draghi has long wanted a weaker euro and a retest of $1.20 looks possible in coming months.  This would boost profits for Europe’s Autonomies and attract international investors, despite all the justifiable concerns over the EU’s economic policies, not to mention Putin’s sinister Novorossiya (New Russia) expansion.

Draghi’s programme for pumping more liquidity into the EU economies triggered short covering and new buying in the region’s stock markets today.  The DJ Euro STOXX 50 wilted in July and early August but has surged over the last three weeks and is close to testing its recovery high.  Euro Banks are still lagging overall but show a similar pattern in recent months. 

Moreover, Draghi’s expanded monetary accommodation program is a very bullish tailwind for European stock markets of at least lengthy medium-term duration, and this may have some spillover influence on other regional markets where the respective countries are not euro-denominated EU members.  However, Europe is still on the front line in terms of fallout from Putin’s reckless expansion which Eastern Europeans states understandably fear will not be restricted to carving up Ukraine.  At best, that presents buy-the-dips opportunities but closes beneath last month’s lows for these indices would be a technical warning: DAX, CAC, AEX, IBEX, ISEQ, HEX, OMX, KFX, OBX, UKX and SMI.