By Tom Fairless and Brian Blackstone 

FRANKFURT--The European Central Bank is nearing a landmark decision to wind down its $3 trillion bond-buying program, closing a chapter on a policy the U.S. used to help restore its growth but one that had mixed results in Europe.

ECB officials are expected to confirm plans to end new bond buying, known as quantitative easing, at their meeting on Thursday. The ECB will thus become the third leading central bank to wind down QE, after the Federal Reserve and Bank of England. Japan's central bank is still buying bonds.

The ECB's journey was complicated by the bloc's unique setup: 19 countries, each with their own tax and spending policies, sharing a single currency. That made it hard to design a one-size-fits-all response to falling consumer prices and high unemployment in some parts of Europe. Using freshly created money to buy government debt drew the ECB into Europe's political battles.

The bank's program was originally designed to last 18 months and total around EUR1 trillion. It has ended up lasting almost four years and costing EUR2.6 trillion ($2.96 billion). Some argue it also helped fuel the rise of populist euroskeptic parties now challenging mainstream politicians, who blamed the ECB for bailing out weak southern economies with northern funds.

"I think QE for the ECB has been economically a success and politically almost a disaster," said Stefan Gerlach, chief economist at EFG Bank who was Ireland's deputy central bank governor when the ECB announced bond buying in January 2015. "That all comes from the fact that the euro area isn't a single economy, it's a bunch of sovereign countries."

After the late start, the ECB is ending new purchases years after the Fed and Bank of England, and at an awkward time. Economic growth slowed last quarter to its weakest level in four years with its biggest economy, Germany, contracting. Global financial markets have turned choppy, and Italy appears to be heading into recession.

"I don't know why the ECB is in such a rush," said Joseph Gagnon, economist at the Peterson Institute for International Economics.

If a more pronounced downturn is indeed on the horizon, the ECB's late exit could complicate its response. While the Fed has reduced its balance sheet in recent years and gradually increased interest rates, it will likely take years for the ECB to shrink its bondholdings. Its negative interest rate makes it hard to use that tool to juice growth.

But ECB officials have shrugged off recent warning signs, having already scaled back the size of their bond purchases for months. "There is certainly no reason why the expansion in the euro area should abruptly come to an end," ECB President Mario Draghi said last month.

The ECB could soften the blow to investors on Thursday by detailing its strategy of reinvesting proceeds from maturing bonds, to keep its balance sheet stable. Buying a larger share of longer-dated bonds, for instance, could provide extra stimulus. Another soothing signal would be to confirm that it won't raise its minus 0.4% policy rate--its key rate--before late 2019.

Each of its coming policy steps could rattle already-fractious financial markets.

"The process of exiting QE is going to be messy because you have to put risk back into the system, you have to price risk," said Catherine Mann, global chief economist with Citi. "And that will be messy because it's been free for 10 years."

The ECB started buying bonds in early 2015, months after the Fed ended its own long-running program that it created during the global financial crisis in 2009. Quantitative easing lets central banks which have already lowered interest rates to close to zero buoy faltering economies by buying government bonds and other debt to reduce long-term interest rates.

But when the Fed and other central banks were buying bonds, the ECB was confronting a debt crisis that started in 2010 in Greece and later expanded to Portugal and Ireland. That made it harder to buy bonds without making it look like the ECB was illegally bailing out weak European governments that couldn't finance themselves in markets.

Complicating matters more, Germany's influential central bank opposed quantitative easing and previous bond programs that were smaller in scope.

By many measures, buying bonds had a big impact. Eurozone growth exceeded the U.S. in 2016 and 2017, and the region created about 195,000 jobs a month over the lifetime of QE, roughly the same as the U.S. Annual inflation was 2% last month, slightly above the ECB's target.

The biggest beneficiary was Germany despite the Bundesbank's opposition, as a weaker euro juiced exports. "Nobody in German industry will say, I'm a great fan of Mario Draghi's policy," said Andreas Moeller, an executive at Trumpf GmbH, a machine-tool manufacturer in southern Germany. "But when we look at the numbers, of course we see positive effects."

His firm's sales have risen about 10% to 12% annually in recent years. Revenues were bolstered by a weak euro, low borrowing costs and economic recovery in large markets like Spain and France.

To achieve this impact, the ECB bought tens of billions in government and corporate debt each month, effectively absorbing all of the new debt issued by eurozone governments during most of the last four years, swelling its balance sheet to 40% of the region's economic output, compared with around 20% for the Fed.

Still, Peter Praet, the ECB's chief economist, marveled recently that the bank largely achieved its goals despite vast unknowns surrounding bond buying and negative rates. Yet he struggled to relate to his wife in a recent conversation why it took so much money to get there.

"I tell her we spent two trillion euros to move inflation by a few tenths of a percentage point," he recalled. "It sounds crazy."

Write to Tom Fairless at tom.fairless@wsj.com and Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

December 12, 2018 05:44 ET (10:44 GMT)

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