European Central Bank measures will positively impact the BiH economy

At its meeting on December 22, 2014, the European Central Bank (ECB) made, according to most relevant economic analysts, a "historic decision". Namely, all 25 members of the ECB Governing Council agreed that the introduction of so-called quantitative easing (QE) measures in the ECB's monetary policy, aimed at preventing deflationary tendencies and reviving economic activity in the eurozone, is a necessary and valid instrument of monetary policy, it was announced from the Office of the Lead Economist of the Central Bank of Bosnia and Herzegovina, reports the BiH news agency Patria.

Given that the previously created austerity policy did not yield the expected results, that the eurozone is experiencing very low growth rates, that there are strong deflationary tendencies, that demand is not growing, and that no new jobs are being created while unemployment remains high, the ECB decided to activate the so-called "heavy artillery".

The decision to introduce quantitative easing measures means that EUR 60 billion will be injected into the system monthly, or a total of EUR 1.14 trillion, starting from March this year until September 2016. This undertaking is only tentatively limited to September 2016, and if it does not show adequate effects by then, there is a possibility of its extension. The program involves the creation of money supply and the "injection of liquidity" into the economic system through an expanded asset purchase program, covering both public and private sectors. Bond purchases will be carried out according to the "capital key", i.e., according to the capital share of individual national central banks in the ECB, while 20% of purchases will be centralized with risk sharing between the ECB and national central banks.

The main goal of this program is to stimulate investment and consumption. Otherwise, without reviving investment and demand, the eurozone will almost certainly enter the vortex of deflation, on the edge of which it has been since December last year, which it would not be able to control later, with unforeseeable consequences for its economic structure and political stability. One of the indirect goals is to reach the target inflation rate of around 2%, as a far lesser evil than deflation. With this, the eurozone has resorted to measures that the USA, Great Britain, and Japan have been implementing for a long time, since the crisis of 2008. For example, the USA injected USD 85 billion into the system monthly, economic activity was dynamized, unemployment fell to 5%, decent economic growth rates were recorded, and demand was also dynamized. President Obama officially announced the exit from the crisis and the entry into an era of prosperity.

However, the question is whether this program will be as successful as it has appeared so far in the USA, and Great Britain, and only partially in Japan. This program is, in a way, a copy of the model used by the USA in its efforts to stimulate the recovery of economic activities. The same analysts who consider this ECB program necessary also consider it insufficient, and that on its own, without structural reforms and adjustments and further disciplined implementation of austerity measures in public spending, it will not yield the expected results. Furthermore, the effectiveness of implementing this program will be challenged by the process of harmonizing the ECB and the 19 national central banks of the eurozone, which is a time-consuming process, and a key characteristic of crisis management is not decentralization of decision-making and management, but rather, high centralization and efficiency in implementing decisions. In addition, this will be a very important process of harmonizing national goals and interests within the EU member states, which, to be fair, often do not converge.

WHAT THE ECB MEASURES FORESEE

It is certain that within this ECB program, each government individually must provide a program that will be adequate to the ECB's requirements, with clearly defined goals and expected results. Money from this program will not be usable for covering existing government deficits, but exclusively for investments. Therefore, money from this program will essentially be made available to banks, i.e., to the economy, which needs to strengthen the competitiveness of the European economy, which is, without a doubt, a key segment of the aforementioned necessary structural adjustment. Essentially, the logic of how these measures function is as follows:

- The ECB creates money by purchasing bonds,
- The money thus created puts pressure on lowering interest rates,
- Companies borrow and invest under favorable conditions, as do individuals,
- By intensifying investment, employment levels increase, and new demand is created,

- Wages in the real sector rise, consumption increases, aggregate demand grows,
- This leads to real economic growth and GDP growth,
- This increases company profits and motivation for further investment, with additional job creation and continuous demand growth,
- This causes an increase in public revenue, and combined with savings in the public sector, reduces pressure on public debt repayment, and lowers fiscal pressure,
- The result is economic recovery with the emergence of economically acceptable, "healthy - controlled" inflation.

Developments in currency markets, which are already being called "currency wars" these days, are merely a consequence of the measures that national economies are implementing in an effort to revive economic growth in their regions. It is known that inter-currency relations are fundamentally formed based on the movements of supply and demand for certain currencies, combined with the real production capacities and competitiveness of certain economies. Thus, when the Federal Reserve in the USA launched an intensive money injection program into the economic system (QE1 program), the dollar weakened against the euro by a full 15% in just one month. However, when the Federal Reserve announced the suspension of the program in the second half of 2014, the dollar began to strengthen, i.e., began to recover. In Japan, after the launch of an identical mechanism in 2010, the same thing happened: a sharp weakening of the yen against the euro occurred. The weakening of the euro against the dollar began the moment it became clear that the ECB could not avoid introducing measures to inject money into the eurozone economy. Their effective implementation will most likely cause further weakening of the euro, especially against the dollar. However, the weakening of the euro is not bad news for the eurozone economies; it will make European goods more attractive to foreign importers, and Europe more attractive as a tourist destination, all of which will positively affect the so-called creation of foreign demand for European goods and services. A strong euro at this moment is not in the interest of the European economy, as it would be an obstacle to recovery.

The convertible mark, given its peg to the euro, will share its fate when it comes to its relationship with other currencies. The convertible mark will certainly weaken against the US dollar and other major currencies. This could have a positive effect on the BiH economy, with its adjustment and faster restructuring. For foreign importers outside the eurozone, BiH goods and services will become significantly more attractive. The planned ECB measures, which are intended to dynamize the EU economy, will also have a positive impact on the BiH economy. With a more organized approach and well-thought-out strategies for entering foreign markets, exports, which in the current macroeconomic model are a matter of "survival" for the domestic economy, could gain additional momentum and significantly influence the dynamization of the domestic economic structure.