Despite pressures from the appreciation of the euro, which
had hit a 15-month peak of $1.3711 on February 1, 2013, Mario Draghi of the
European Central Bank announced four days later that the benchmark financing
rate would be on hold at the record-low 0.75 percent. In making the
announcement, he stressed that the worst was over for the Eurozone and that the
uncertainties would be gone by midyear. “The economic weakness in the euro area
is expected to prevail in the early part of this year. But later in 2013,
economic activity should gradually recover, supported by our accommodative
monetary policy stance and the improvement in financial market confidence.”
Draghi was tacitly undercutting Francois Hollande’s earlier statement that the
euro should depreciate so as not to hurt economic competitiveness. A higher
euro means more expensive euro-based exports abroad. The relationships between
monetary policy, a currency, and economic growth are complex. It would thus be
worthwhile to unpack the scenario facing Draghi and Hollande in early 2013.
The full essay is at Essays on the E.U. PoliticalEconomy, available at Amazon.