As Europe is the epicentre of the coronavirus outbreak, countries across the EU have gone into lockdown – including some of the bloc’s biggest economies. This has brought economic activity to a halt and provoked drastic measures from the European Central Bank as it bids to save the euro. President of the ECB – Christine Lagarde – launched a huge bond-buying programme earlier this month worth £680billion as she looked to stimulate the European economy.
But Professor Iain Begg tells Express.co.uk that the move, if done without necessary caution, could lead to a second economic crisis.
He said: “It is a return to a practice the Fed, the Bank of England and later the European Central Bank used to deal with the financial crisis.
“It is simply a monetary instrument being used to stimulate the economy. With interest rates so low, the ECB has no other option but to pump money into the economy.
“The danger is if you pump too much money in, two thousand years of history tells us that leads to inflation.
“But inflation in the short term is not the problem, we may not even need to worry about it for quite some time.
“There is some view is that if you have a monetary stimulus on this scale, it diminishes the profitability of banks because they can’t charge as much interest and that in turn undermines their safety.
“Therefore there is risk of a financial crisis as a response to the previous financial crisis – in this case the coronavirus pandemic.
“But that’s speculation rather than certainty.”
The UK has dealt a similar response to the coronavirus crisis, pumping upwards of £600billion into the economy while also dropping interest rates to just 0.1percent.
The Bank of England warned: “The spread of COVID-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary.”
However, Professor Begg also highlights how the EU has become divided as a result of the ECB’s measures, as German banks feel they may be forced to share damage with Southern Europe as happened in 2008.
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The economist added: “In political terms there has been a strong resistance, especially from Germany and some of the other creditor countries inside the eurozone to this action by the European Central Bank.
“It was very much seen in the days of Mario Draghi (former President of the ECB) as something he was doing as it suited Italy, and was against the German ethos of having monetary stability.
“So you might see that kind of objection resurfacing not immediately, but a few months down the line you could see opposition to what Christine Lagarde did from German sources.”
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