Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.

The full essay is at "Structural Reform and Economic Sustenance."

 1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

                                                                                                       

ECB’s Draghi Resists Pressure to Devalue Euro and Stimulate Growth

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.

                         Mario Draghi addressing the World Economic Forum. In resisting pressure to lower the benchmark rate, he increased his financial stature abroad. 

The full essay is at Essays on the E.U. PoliticalEconomy, available at Amazon.