News Analysis: U.S. monetary policy changes have knock-on impacts on euro zone-Xinhua

News Analysis: U.S. monetary policy changes have knock-on impacts on euro zone

Source: Xinhua| 2022-08-12 06:59:30|Editor:

ROME, Aug. 11 (Xinhua) -- The United States' monetary policy adjustments by the Federal Reserve are having huge and largely negative impacts on the 19-nation euro currency zone, especially high-debt countries like Italy, a leading economist has said.

Marcello Messori, director of the School of European Political Economy at Rome's LUISS University, said that in Italy and in the wider euro zone, the short-term gains represented by a relatively weak euro currency, such as making euro-priced Italian exports cheaper and attracting more tourism from outside the eurozone, would not be enough to counterbalance the currency's weakness.

"It is difficult to conceive that the long-term prospects of an important economic area such as the euro area can be based on growth led by exports," Messori said in an interview with Xinhua.

The U.S. Federal Reserve hiked interest rates by 75 basis points in both June and July as part of its broad efforts to increase borrowing costs and slow down inflation. The move in June was the largest single rate hike in the U.S. since 1994, and after the July increase the U.S. benchmark interest rate is at its highest level since December 2018.

The European Central Bank has followed suit, raising its own benchmark interest rate by 50 basis points in July, which was the first rate hike for the euro zone in 11 years.

Both the U.S. Federal Reserve and the European Central Bank said further rate hikes are likely.

One result of the moves is that the dollar has strengthened against the euro, briefly surpassing the value of the euro several times in mid-July and since then trading broadly in step with the euro.

According to Messori, the moves by the U.S. Federal Reserve may have helped force the hand of the European Central Bank.

"The European Central Bank had to strengthen its restrictive monetary policy to avoid lagging behind in terms of interest rate structure because of the restrictive monetary policy of the Federal Reserve," Messori said.

He said another motive behind the European Central Bank's move was to provide support for the euro, without which the currency could have lost even more ground to the dollar.

Messori said the inflation-related challenges the European Central Bank is facing are greater than those in the U.S. because European countries are more dependent on energy imports and international supply chains which are now disrupted by the ongoing Ukraine crisis, which has sparked an increase in energy prices and limited food supplies.

"Handling supply bottlenecks is harder to confront with monetary policy than rising prices created by higher demand," the professor said.

While Italy -- the European Union's second largest exporter after Germany and a major global tourism destination -- will see some short-term gains from a weaker euro, Messori said long-term problems for the country stemming from the European Central Bank's monetary policy could be difficult because of the country's high deficits. A weaker currency makes servicing debts and selling new debts more expensive.

Italy has one of the highest levels of public debts in the world when measured as a percentage of the country's gross domestic product.

"Countries with high public debts don't have a significant fiscal capacity to help handle a possible recessionary phase or to handle a possible stagflation," Messori said.

"In the case of Italy, it seems to me that the possible impact from changes in European Monetary Policy and the impact of changes in U.S. monetary policy is particularly significant."

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