All is not well in the euro area. As a whole, the region suffered six quarters of economic contraction between the end of 2011 and the beginning of 2013, and only recently has aggregate economic growth turned positive. Inflation has been problematically low, indicative of weak demand despite enormous monetary stimulus on the behalf of the European Central Bank and the intervention of the European Commission and the International Monetary Fund in nations that teetered on the edge of financial catastrophe in 2011 and 2012.
Behind the curtain of the union, different countries are facing dramatically different economic fortunes. Germany, the region’s largest economy, is meandering through a decidedly strong recovery, while Greece, Cyprus, and Spain are still experiencing severe recession and enormous unemployment. Joblessness in the euro area at large is high at 12 percent, but is absurd at 27.8 percent in Greece and 25.8 percent in Spain.
“As you know, the euro area as a whole is undergoing a process of fundamental reform,” ECB President Mario Draghi told the Economic Club of New York in October. “The overarching objective is to lay the foundations for recovery and more jobs, to foster financial stability and fiscal sustainability and to enhance international competitiveness for the benefit of all parts of the economy and wider society.”
To that end, European policy makers have been hammering out much-needed financial and economic reform, including the development of a European banking union that ECB executive board member Yves Mersch has described as “essential to unravel the legacy of the financial crisis” and “a cornerstone of a new Europe.”
But, as it has been in the United States, behind the political, structural, and financial reform has been the region’s central bank. The euro area’s monetary watchdog has had its foot on the gas pedal throughout the crisis and the recovery, and on Thursday, Draghi reiterated his commitment to monetary accommodation.
“Incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment,” said Draghi at a news conference on Thursday. “Overall, we remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required.”
The comments could have been cut and pasted from the ECB’s December statement, in which the monetary authority also decided to keep key ECB interest rates unchanged. The ECB Governing Council has kept the interest rate on main refinancing operations, as well as the interest rates on the marginal lending facility and the deposit facility, at 0.75 percent, 0.25 percent, and zero percent since November, a decision made in light of the region’s anemic recovery.
Like the U.S. Federal Reserve, the ECB has a 2 percent inflation target that it is firmly committed to but is not yet achieving. Annual inflation ran at 0.7 percent in January, down from 0.8 percent in December, but the ECB is confident that “risks surrounding the economic outlook for the euro area continue to be on the downside” and that “both upside and downside risks to the outlook for price developments remain limited.”