Covid-19 and the Euro: Has the EU’s Common Currency Sheltered or Hindered Member States During the Crisis?

The main purpose of a common currency within Europe is to promote security and growth as well as…

The main purpose of a common currency within Europe is to promote security and growth as well as to economically integrate member nations. Ideally, this offers mutual support during a crisis where struggling economies can turn to larger, more stable ones to spread risk more effectively. However, the pandemic has been an ongoing test of eurozone solidarity. When the coronavirus first arrived in Europe, countries quickly began prioritising the needs of their own citizens, even competing against each other for vital medical supplies. There was little cooperation, with most nations closing their borders. 

The stability offered by a shared currency, both within member nations and externally, allows exporters to make more conclusive projections of future markets. This can provide opportunities for a swift recovery. However, having a single monetary policy has proven to be a hindrance on the eurozone as it struggles to accommodate individual economic conditions. While every nation has felt the devastation of the pandemic, the contrasts in both impact and response have been stark. 

The EU’s Commission forecasts a deep and uneven recession in the European Union. Uncertainty is exceptionally high even with a predicted recovery in 2021. According to Paolo Gentiloni, the Commissioner of the Economy, impact will be uneven across nations. This will be dependent on how quickly restrictions are lifted and the importance of sectors such as tourism within certain economies. Countries where tourism accounts for a large share of their gross domestic product will likely be impacted the most severely. Greece is already predicted to have the deepest contraction at 9.7 percent in a single year, alongside Italy and Spain where declines are forecasted to exceed 9 percent. Malta and Cyprus are also expected to have relatively large declines. With overall predicted growth for 2021 at 6.1 percent, contraction is still greater and the EU’s economic activity will likely return to the level experienced last year at the earliest, 2022. Furthermore, recent negotiations over the stimulus deal have created a rift between member nations, which pits the continent’s fiscally more conservative northern economies against their southern counterparts. Whilst a common currency offers cohesion, there will still be great disparities in terms of economic performance – disparities that existed prior to the pandemic and have since been accentuated because of it. 

It is also worth noting that a common currency strives towards lower interest rates and minimal exchange rate fluctuations for member states. The appropriate policy response would certainly tap into the euro’s potential in the crisis and help shelter those nations. Common instruments that result in safer assets for EU countries can be provided, thereby preventing further instability and fragmentation from necessary fiscal reactions. A good example of this is the European Central Bank (ECB) introducing a €750 billion recovery fund. This assertive response to the crisis is the sort that creates confidence among investors as it shows the euro to be reliable during a major shock. Although, the ECB previously warned eurozone finance ministers that stimulus measures worth up to €1.5 trillion could be needed to offset the economic crisis brought on by the pandemic. The ECB’s president, Christine Lagarde, also predicted that the eurozone’s GDP would contract by 8 to 12 percent this year alone.

In terms of markets, metrics show a growing confidence in the euro with Europe’s response to COVID-19. The currency saw an advance against the dollar for a second month and finished the third quarter rising in strength (trade-weighted). The increased optimism is also indicative of the confidence that member states will continue to swiftly prevent a second wave (or extended first wave) more efficiently than other regions currently imposing social restrictions. This subsequently increases the likelihood of economic growth within the eurozone and potentially attracts greater inflows of capital that support the euro.

1 comment
  1. Well done June. The article is informative, clear captivating and can be understood by anybody even those who are not within the financial sector. I really enjoyed reading it.
    Awesome! Keep it up.

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