Mario Draghi led the European Central Bank into a new era, pledging to buy government bonds in an asset-purchase program worth at least 1.1 trillion euros ($1.3 trillion) to counter the threat of a deflationary spiral.

The ECB president unveiled a quantitative-easing plan of 60 billion euros per month until at least the end of September 2016 in a once-and-for-all push to put more cash into circulation and revive inflation. The region’s 19 national central banks were handed responsibility for 80 percent of the additional purchases and put on the hook for their own losses, a move intended to assuage critics.

A near-stagnant economy and the risk of deflation forced Draghi’s hand six years after the Federal Reserve took a similar step -- and three months after the U.S. central bank ended its purchases. The 67-year-old Italian’s gamble is that the benefits of quantitative easing -- should it work -- outweigh the threat of a backlash in Germany, whose politicians and central bankers have vehemently opposed the move.

“One could argue that this type of approach Draghi is using should have been applied much earlier, which would have gotten Europe on a similar kind of platform the U.S. was on,” Stephen Schwarzman, chairman of the Blackstone Group LP, said in a Bloomberg Television interview at the World Economic Forum in Davos. “It is never too late to do the right thing.”

Investors reacted by selling the euro and buying European stocks. The shared currency declined to an 11-year low, losing 1.8 percent to $1.1408 at 6:05 p.m. in Frankfurt. The Euro Stoxx 50 added 1.6 percent. Athanasios Vamvakidis, head of G-10 foreign-exchange strategy at Bank of America Merrill Lynch, said the plan was at the high end of market expectations.

“We’ve seen over the last few years you have to trust in Mario,” Laurence Fink, chief executive officer of BlackRock Inc., said in Davos. “The market should never, as we have seen now, the market should not doubt Mario.”

David Fuller's view

Well done Mario Draghi, who has certainly earned his accolades and any plaudits likely to come his way.  I have said it before but he has the toughest job in central banking, requiring a superb and also practical financial brain, exemplary diplomacy to deal with diverse interests and big egos, a thick skin to survive endless brickbats, and a laser-like focus on the daunting challenges he has had to face. 

The comment above: “… this type of approach Draghi is using should have been applied much earlier”, does not understand the diverse interests and tortuous complexities that he has had to face as the EU experiment does most of what can go wrong before getting things right.  Moreover, this process still has a long way to go.

With crucial help from the EU Court of Justice, Mario Draghi has been able to achieve most of what he wants in terms of QE.  Yes, individual countries are responsible for 80% of the additional purchases and are responsible for their own losses.  So they should be, in my opinion, if they still regard themselves as sovereign countries, rather than states within a federal system.  Moreover, I doubt that Germany would have accepted QE without the 80 – 20 agreement.

For investors, we certainly cannot conclude that the EU’s problems are now resolved.  It still has a largely undemocratic, hugely expensive and too often unaccountable bureaucracy.  Moreover, Europe’s socialistic economic policies are not competitive in the global economy in which it has to compete.

Nevertheless, for investors, the EU’s QE programme is good news.  There is little chance of the European Union either imploding or breaking up between now and the end of September 2016, at the earliest, although there is still a small chance that Greece could vote to leave.  Personally, I think Greece would be mad to leave the EU because Draghi’s QE is just what it requires. 

We will see over the next few days, but even if Greece did pull out, Europe’s competitively priced stock markets should now see a good run to the upside.  I also assume that Mario Draghi will stay on, having won this most important battle.  Bundesbank officials may gripe about QE, if only to hold a perceived moral high ground, but Germany benefits more than any other country from the Euro’s slide.  Moreover, the Bundesbank faces only 20% of the QE risk that it feared. 

Europe’s Autonomies should have the best combination of lower risk and greater upside potential, because they are major beneficiaries of growth opportunities in other parts of the world.  The Euro is likely to remain soft but there are European funds which hedge the currency risk, as you will see in Eoin’s section below.  

Lastly, most of Europe still has the old Soviet throwback - Vladimir Putin to contend with, but he currently has more problems than most.  Sanctions remain a cost for Europe but it benefits so much more from cheap oil and gas, even with a soft Euro.  A hat tip for Mario Draghi from investors in other stock markets is justified, because he has lowered widespread concerns over Europe’s economic and political stability.