Our Opinion: 2019

The Euro’s 20th birthday

In its 20 years, the Euro, brought into being as an accounting currency in January 1999 (and a tangible one three years later) has defied its early critics, cheated a near-death experience (in the debt crisis of 2009-2012) and is now more popular than ever with the public. The euro area has grown to 19 countries and ranks as the world’s second-largest economy, based on market exchange rates, second only to the US.

But the euro has only muddled through. At its inception, some economists warned that binding Europe’s disparate economies to a single monetary policy was an act of historic folly. Political will meant that just enough was done to ensure the euro survived the crisis – Mario Draghi, European Central Bank boss, said he would do “whatever it takes” to save it – but none of the union’s fundamental problems were solved.

Many see the existential crisis suffered by the euro as proof that shackling such diverse countries together was always going to create disastrous financial, economic and social tensions. Optimists, however, believe recent history will spur the kind of integration – such as substantial pan-eurozone, fiscal transfers, a banking union and mutual guarantees of member states’ debt – necessary to stabilise the currency zone for the long term.

There are no signs, however, of this happening. Fear of scaring financial markets – and voters – means there are no initiatives in the pipeline to resolve the incompatibility at the heart of the euro project. Southern powers want more integration to insulate their vulnerable economies. Northern ones balk at the risk of future bailouts. Finance meetings result in stalemates.

No wonder negotiations over rescuing weaker states (Greece, Spain, Portugal and Italy) have left a bitter aftertaste. Debtor countries feel mistreated, particularly by Germany; creditors resent bailing out poorer members.

The euro was intended to be a unifying force, underpinning the competitiveness of an already formidable export machine. However, it has been a disaster for much of Europe. Taken as a whole, growth has slowed and unemployment risen markedly since its introduction.

The euro set in train a destructive dynamic that created unsustainable fiscal, credit and construction booms and then, by denying the natural adjustment mechanism of currency realignment, forced debtor countries into punishing internal devaluations. Voters support it because the middle classes in the poorer countries like having a German exchange rate to protect the value of their assets, savings and earnings. They are unlikely to support a move to devalue their wealth by 30% overnight.

As Britain stands on the brink of Brexit, it is good to remember that, 20 years ago, most of the British establishment was in favour of joining the euro, envisaging serious economic decline if the UK stood aside.

As the Euro celebrates its 20thbirthday, the EU is still making bad decisions. Its institutions don’t work very well –because it pursues a fundamentally political agenda, either ignorant of the economic costs or oblivious to them.

31st January 2019