The State of The Euro

The euro (€) was 20 years old on New Year’s day 2019, so now’s the time to ‘celebrate’ its birthday. The start of another year is also a traditional time for reviewing where we’ve been, where we’re going and for setting quizzes. Let’s do all these things to celebrate the common currency’s emerald anniversary.

Our mini euro-quiz:

  1. quiz 5Of the four largest economies in the EU which had the lowest growth over the last 20 years?
  2. Which of the big four had the highest growth over those two decades?
  3. How much faster did the other two eurozone economies grow than the slowest over the lifetime of the euro?
  4. Has the euro generally met its objectives and expectations for all the zone’s economies so far?
  5. Will the euro survive to its 21st birthday?

You probably guessed the first answer if you didn’t know it – Italy. The country’s GDP increased by 9%, just 0.45% a year on average. The highest growth (42%) was achieved by the UK, the only one of the four not in the eurozone; so much for Tony Blair’s confident prediction that growth would suffer if it didn’t join the euro. The other two major economies, France and Germany, both grew by 32%, four times faster than Italy but a lot less than the UK.

The expected benefits of the single currency were that it would eliminate wasteful conversions, promote economic convergence and stimulate growth. It may sound logical but that doesn’t mean it’s necessarily true. In practice the economies in the eurozone have diverged and growth hasn’t been enhanced – when theory and practice are very different it must be the theory that’s false. We have shown before that the Union was never the determining factor in promoting economic growth, the initial (EEC6) surge was more likely a ‘dead cat bounce’, following the devastating war, and the EU28 has underperformed against other trading zones (see Did the EU Bring Us Growth?).

german unificationA single currency was seen from the very beginning as a key signifier of a single nation, like a flag, insignia or passport it is a mark of belonging. It would help mould us into a common mindset, to identify passionately as Europeans. It would promote convergence towards a single economy bringing equality and prosperity to all its constituent communities. The promotion of the eurozone was key to the mission of Ever Closer Union and, to its missionaries, its survival matters more than any earthly problems it may have created. There were many who predicted the dangers of attempting to unify such diverse economies under the discipline of monetary union but perhaps the examples of Germany and the USA spurred their determination. The German Zollverein began in 1818 with more countries joining in 1834 and 1866; it undoubtedly helped the political unification of Germany in 1871, with the Prussian Bank becoming the Reichsbank and controlling the currency. But perhaps the United States of America was the definitive model for a future United States of Europe. Prior to the Civil War there was no US federal currency but in 1863 an act was passed enabling national bank notes to be distributed which were more reliable than the thousands of different (and frequently-counterfeit) ones in circulation. The Federal Reserve Bank was finally created in 1914.

However, neither the German nor American states have achieved economic uniformity, the richer ones subsidise the poorer. This is true also of the United Kingdom where the South East is the only region that earns more than it spends and transfers part of its wealth to others. These richer states and regions don’t make a fuss, they are all one-nation states, unlike the EU where there is (as yet?) no ‘demos’ (see On Democracy-1). carnival costumesSuch transfers are illegal in the eurozone but are essential for a monetary union if it is to survive. If something must happen it will happen – and it does happen in the eurozone but in a way that is disguised from its citizens; they’ll be cross when they find out, at least in the wealthier nations. Furthermore, the others mentioned are all fiscal unions as well as monetary ones, which the eurozone is not. A fiscal union means sharing a common budget with tax and spending levels determined by a central authority and debt financed by a common bond (there may be limited variation at state or regional level, as in the USA; it does imply debt sharing).

The eurozone was initially launched with 11 member states (Austria, Belgium, Finland, France, Germany, Netherlands, Ireland, Italy, Luxembourg, Portugal and Spain). Two years later Greece joined, amid criticism that it did not meet the qualifying criteria except by an EU-sanctioned fudge (also true for founder-member Italy). Actual euro notes and coins were introduced 2002 and over the course of the next decade Slovenia, Cyprus, Malta, Slovakia, Estonia and Latvia joined, and finally Lithuania (in 2015). The UK and Denmark negotiated opt-outs under the Maastricht Treaty (1992) but the other seven EU nations are supposed to join when their economies are ready – if they ever are and if they ever do.

So there are now 19 members. Some have suffered badly, especially the ‘PIIGS’ – Portugal, Italy, Ireland, Greece and Spain but also Cyprus (its banks rescued by Russia, not its bedfellows!) Blair wasn’t the only one to be confident that staying out of the single currency would see growth slashed, other pro-EU folk predicted the same but if they had checked history – even as recent as the previous administration of John Major which crashed out of the ERM and destroyed the Conservative’s reputation for sound economic management – he (they) should have seen the dangers.

There have been many examples of monetary unions that have broken up, especially in Europe, including the Latin Monetary Union, the European Monetary Snake (EMS) and the European Exchange Rate Mechanism (ERM). None of these failure would match the scale of problems that will occur if the eurozone ends with a disorderly breakup, none would affect the world to a comparable degree because the eurozone accounts for 13% of global GDP plus the euro is a reserve currency and is involved in trade contracts around the globe.

The ERM was one of several preparatory moves towards the common currency and included the ECU (European Currency Unit), an accountancy unit rather than real spending money. The UK couldn’t maintain alignment and had to let the pound devalue; thank goodness, it’s the usual escape mechanism when countries need to regain competitiveness but it’s a route denied to Italy and others now that they have tied themselves to the deutschmark (sorry, euro).

eurozone joker 1We have answered the first three of our mini-quiz questions, they were simply factual. History shows that the UK survived pretty well with its own currency while its main ‘rivals’ weren’t as lucky, or perhaps it wasn’t luck but a consequence of gambling with their money with poor odds for a rare political prize.

Our companion piece (The Future of the Euro) looks at little further into other failed monetary unions (with one excruciatingly similar parallel) and at the odds that some or all of the players at the euro-table will have to fold (with consequences for us all).



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