ECB bond plan won't fix Europe's economy

Job seekers wait in a line to enter an employment center before opening in Athens, Greece, Sept. 10, 2014.
Kostas Tsironis | Bloomberg | Getty Images
Job seekers wait in a line to enter an employment center before opening in Athens, Greece, Sept. 10, 2014.

It's a start, but it's not a cure for Europe's deepening economic stagnation.

Borrowing from the playbook of their U.S. and Japanese counterparts, European central bankers Thursday embarked on a highly anticipated plan to buy hundreds of billions of dollars' worth of government bonds to try to revive growth by pumping cash into the financial system.

European Central Bank President Mario Draghi announced an open-ended pledge to buy 60 billion euros ($70 billion) worth of private and public bonds every month in a program that could amount to as much as a trillion euros.

Read MoreOpen-ended European QE starts 'with a bang'

The long-awaited—and, many say, long-overdue—program will start in March and last through September 2016, Draghi told reporters.

The hope is that the bond-buying spree—known as quantitative easing—will help reverse a worrisome drop in prices that has recently spread throughout the euro zone.

First tried in Japan in the early 2000s, and then deployed in 2008 by the U.S. Federal Reserve, the goal of quantitative easing is to boost growth by lowering interest rates and making cash easier and cheaper to borrow, spurring lending and spending.

In the U.S., Fed officials recently decided to end a third round of QE after sucking up more than $3 trillion in bonds. Though the Fed policy was not without critics, it is generally credited with helping to get the U.S. economy and banking system back on its feet after the worst financial crisis since the Great Depression.

Europe is not alone in facing the perils of falling prices and economic slowdown. Outside the U.S., the rest of the world's economy is grappling with dropping prices and slower growth. While the recent crash in oil prices has accelerated the trend, prices of raw materials and natural resources have been falling since the Great Recession ended.

Europe's bond-buying plan won't hurt. But it will do little to address a series of political and structural barriers that have plagued the euro zone since the 2008 crisis severely tested the Continent's then 9-year-old experiment with a common currency.

"I think it is a mistake to suppose that (quantitative easing) is a panacea or that it will be sufficient," former U.S. Treasury Secretary Larry Summers said Thursday at the World Economic Forum in Davos, Switzerland. "There is every reason to expect that QE will be less impactful in a context like the present than it was in the context of the United States."

To begin with, Europe's bond-buying comes much too late to help blunt the financial damage inflicted by the credit crisis of 2008. While U.S. bankers moved aggressively—some critics say too aggressively—to seize foreclosed homes and write off bad mortgage debt, many Europeans bankers are still working to heal their balance sheets.

Despite widespread calls for a bond-buying plan since the 2008 credit crunch first hit, European central bankers faced a thicket of political backlash and bureaucratic squabbling that thwarted those proposals.

Now, with interest rates in Europe already near zero, the impact of further money easing will be muted. Lower rates in Europe will also likely be less effective than in the U.S. because of differences in the way companies access credit.

In the U.S., many large companies borrow directly from investors by selling corporate bonds. By contrast, a bigger share of corporate credit in Europe comes from banks, many of which are still reluctant to lend or working off bad debts

Even if the ECB plan eases the flow of money, looser credit won't address a wider range of reforms needed to get Europe's slowing economy growing again. It may even postpone progress on making those changes.

That warning came Monday from German Chancellor Angela Merkel, who cautioned that printing more money—a policy strongly opposed by most German voters—shouldn't been viewed as a quick fix.

Read MoreMerkel: ECB action no substitute for economic reform

"The pressure to improve competitiveness in Europe must remain or else nothing, and I really mean nothing, can help us," Merkel told a group of investors in Frankfurt, urging that the ECB's bond buying should not leave "the impression that what needs to be done in the fiscal and competitive spheres could be pushed into the background."

Those reforms include giving companies more flexibility to hire and fire workers and cutting red tape for new businesses, among other things.

Merkel, along with German bankers, businesses and many voters, fears that the ECB's move to ease credit will take some of the pressure off heavily indebted "peripheral" euro zone members struggling to meet tightfisted austerity programs imposed by the European Union.

Those government spending cuts have become even more painful as Europe's economy continues to weaken. In Greece and Spain, roughly half of all younger workers (aged 15 to 24) can't find a job. The economic pain has fueled a political backlash that is further complicating reforms needed to get Europe's economy moving again.

The ECB's new quantitative easing policy may give those struggling countries more breathing room. But, as Merkel has warned, that may only delay reforms needed to get Europe's economy back on track.

"What the Germans are worried about is if you give the countries more fiscal flexibility and you give them another helping hand with QE it sort of dilutes the incentive for government to press ahead with reforms ," said Howard Archer, an economic with IHS Global Insight. "Those countries may think they can just eke out enough growth to get by for the time being."