Expert Pitch

Covid-19 Underscores Flawed Eurozone Single Currency System

University of Maryland, Robert H. Smith School of Business

Finance professor Albert “Pete” Kyle at the University of Maryland’s Robert H. Smith School of Business is available to expand on his comments, below, on why the coronavirus outbreak underscores the flaws of the EU’s single-currency system.

The following – for use at will – is excerpted from this Maryland Smith post ‘What the Pandemic Means for the Future of the Eurozone’:

…Central banks in the United States, Britain, Canada and Australia, for example, each lowered their key interest rates. The European Central Bank announced a package of stimulative measures aimed at bolstering economies across the eurozone’s 19 countries.

In Europe, Kyle says, the problem is that unlike its central banking peers, which set monetary policy based on the economics of a single country, the ECB must take into account the economic indicators, risks and tolerances of the entire union, whose economies and crises frequently differ more than they align.

“It’s a fatally flawed currency structure that doesn’t make any sense,” says Kyle.

Today, Italy is among the countries hardest hit by Covid-19…The level of monetary stimulus that Italy might need to emerge from the Covid-19 crisis, therefore, might be far more than what’s in the best interests of a less-impacted country, where such stimulus could bring adverse consequences. When monetary policy is too accommodative it effectively weighs on the value of the country’s currency and risks over-the-top inflation.

“None of the countries in the European Union countries in the eurozone have the flexibility to just ‘print money’ as needed,” says Kyle, using the term often associated with highly stimulative monetary policy.  “That really hamstrings the EU. It forces them into a kind of deflationary set of policies that they are not easily going to get out of.”

And there are the limitations imposed from a fiscal standpoint. The European Union requires that member countries not exceed fairly modest deficit levels. More importantly, if they seek to stimulate the economy with fiscal policy that violates debt limits, the debt they issue is likely to carry high interest rates because buyers of the debt know that the country cannot print money, if needed, to pay it back. They must instead beg for loans from the European Central Bank, which may or may not accommodate their needs. Greece, for example, defaulted on its debts, setting an example which other countries in Europe may follow as a result of coronavirus-induced economic dislocations.

 “It’s much better for these countries to have their own currencies. If you have your own currency, you can let interest rates go to zero, and even go negative.”

Kyle’s (bio) research focuses on market microstructure including market liquidity and contagion. He has served on the Presidential Task Force on Market Mechanisms (Brady Commission, 1987), and as a member of the Financial Industry Regulatory Authority (FINRA) Economic Advisory Committee and the U.S. Commodity Futures Trading Commission's Technology Advisory Committee.

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