The Innards of the Bumble Bee

The euro has been on a roll in recent time. Ever since Draghi's "whatever it takes" in July 2012, it has appreciated close to 15%. Even this year, it is up from the March pre-ECB lows, and trading at multi-year highs (last seen Late 2011). And there are worries about it in some quarters

Given the current economic situation and some serious disinflation in the Euro area, the last thing one would want a strong currency. Export competitiveness is one issue, another is importing deflation. Not particularly helpful for an economy struggling to maintain positive growth and inflation

But I think, may be, just may be, this is a bit over-blown. See below the trade patters of Euro area and major countries within it

Eurozone countries have thrived on trades. One of the most important non-political reason that Eurozone exists in the first place is trade. Reducing trade friction was a major motivation for the monetary union. However, the important thing to notice is Eurozone countries have thrived on trades mostly done with each other. Within the monetary union

This makes the impact of euro exchange rate on export competitiveness and deflation importing much less severe. When Spain trades with Germany, it is exporting disinflation through wage growth (or rather lack of it) and not through Euro.

And that's why it is so important to move the correct lever in a disparate moentary union. Even if ECB cuts rate in subsequent meetings, it will be mostly symbolic, and will work, if at all, through the expectation channel. The rate cut that will have any real impact will drive the policy rates to deep negative territory. So the way out, and I think the only way out, is directly targetting credit growth