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Time is running out for the euro


Themes: Economics and policy

A leading Cambridge economist predicts the death of the euro despite the efforts of policy makers who are papering over cracks and trapping very different countries with tight fiscal rules when they should have a looser monetary policy.

Michael Kitson, University Senior Lecturer in International Macroeconomics at Cambridge Judge Business School, feels the collapse is inevitable; the difficulty is predicting when it will happen.

He says euro policy makers have been papering over the cracks and creating difficulties by locking very different countries into the single currency, a single monetary policy regime and tight fiscal rules.

“That creates real problems for many of the countries in the zone; the way they will need to get out of those problems is to devalue their currency, to have a lower exchange rate and to have looser monetary policy. They are really caught in a trap at the moment.”

Speaking in an interview for the Cambridge Judge Business School website, Michael Kitson adds that the papering exercise, through a degree of financial support, is not tenable in the long run and the Eurozone has two options.

“One, it has an integrated fiscal system where you have a European tax and spend system, not fiscal rules, but fiscal integration as individual countries do. That’s very unlikely.

“If you don’t have a fiscally integrated system then the next choice is single currencies and the Eurozone will collapse. I think it might stagger on for a few more years but eventually it will collapse.”

There is, he says, a historical precedent set in the 1920s.

“We had the Gold Standard where virtually the world economy was locked into basically a fixed exchange rate regime. Once one country decided to leave, the whole system unraveled. That country was the United Kingdom in 1931.”