The economic fallout of the coronavirus continues, leading to an increase in unemployment rates as well as deterioration across sectors. In parallel, there is also a noticeable decline in prices of some basic commodities.
As the entire world has decided to live with the virus, some measures have been taken to mitigate the consequences. However, there will be other - as yet - unpredictable repercussions that might be equally devastating.
The global monetary system will feel the impact through the many quantitative easing programmes initiated by central banks, which is driving bond buying binges by printing money. This approach is now the favoured option to ensure liquidity to the markets as governments try to save businesses.
Buying bonds by printing money is also being implemented to help individuals who have lost their jobs. However, this printing spree would have best served its purpose if adopted in a limited way. But the problem is that pumping money into the market overwhelms the ability of economies to avoid potential consequences in future.
For example, the US, the world’s largest economy and with the most important currency, adopted quantitative easing even before the outbreak of the pandemic. The US printed nearly $4.5 trillion, followed by another $3 trillion after the outbreak. It is expected the US will press ahead with this process and reach $10 trillion by the end of this year, which would then account for roughly half the US GDP.
Easiest thing to do
As for the eurozone, 1.5 trillion euros has been printed as part of a plan to pump out 2.7 trillion euros, but the situation is quite different and may expose the European single currency to eventual failure. This is because the operation is carried out by the European Central Bank (ECB) without coordination with the central banks of EU member-states, and the printed money is distributed to deeply affected countries like Greece and Italy.
The ECB’s mass bond-buying has provoked countries with strong economies, such as Germany, where its Supreme Court recently ruled the ECB alone does not have the authority to buy bonds and print extra cash. Such a judgement may doom the entire eurozone to collapse.
And end to 60-year stability
Leading by example, Japan printed $1 trillion, and also Britain, which accelerated the printing of money to 100 billion pounds last week. These bond issues do not have economic and monetary foundations on which the monetary system is based, thus exposing the global monetary system to serious risks. This means the quantitative easing “bubble” may burst in future to end more than 60 years of the global monetary system’s stability with the dollar is its main pillar.
In fact, the world is facing the risk of its collapse, as one of the imperceptible consequences of the coronavirus, and would constitute a global crisis and financial chaos and whose consequences would be unpredictable.
This raises an important question, which is what about countries that do not have the ability to follow the policy of quantitative easing and printing as they like? This includes countries whose currencies are linked to the dollar and euro.
It is difficult to give a direct answer about the consequences from the pricking of the bubble on currencies and economies. However, the repercussions will undoubtedly be the same as in the country of the mother currency, whether dollar or euro.
Regrettably, the options are limited, as the economic and financial conditions do not provide a significant margin for these countries to consider alternatives. The second is that all solutions tried need time to attain desired results. But this does not mean not thinking of taking measures in preparing for the worst, to minimise the risk of preserving national currencies in an optimum way. This would go some way to protecting the monetary and economic situation in these countries.
- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs.