Euro nations are in it together, for better or worse

Twenty years ago, 11 members of the European Union took the historic first step of merging their national currencies into a common unit, the euro. Today, 19 EU members constitute the eurozone, and the euro appears well-established, with further candidates waiting to join.

Birthdays are moments for celebration and reflection. There is much to celebrate about the euro, but honest reflection also reveals its flaws. 

{mosads}The euro’s economic record is mixed, though largely positive. But the euro was always more than an economic project; it played an important political role as a tool to create a truly integrated European Union.

On that score it has been far less successful, and the euro’s political weakness threatens its future and that of the EU. 

The making of the euro

Throughout the postwar era, Europeans sought closer monetary cooperation to promote economic stability. They also pursued the goal outlined in the Treaty of Rome that established the European Economic Community (EEC) of encouraging an “ever closer union” among member states.

The guiding assumption was that the two goals went together, though it was never clear which would come first. 

After decades of false starts, the euro became a reality thanks to the political optimism engendered by the end of the Cold War. German Chancellor Helmut Kohl, eager to seize the opportunity to reunify Germany after the fall of the Berlin Wall but also pro-Europe, promised French President François Mitterrand that Germany would remain committed to the continent.

This was both a continuation and an intensification of the long-term goal of European integration: to harness German power to the benefit of the continent as a whole.  

Even though the European Union had neither a common treasury nor tax policy, Kohl and his colleagues hoped the euro could provide momentum for further political integration.

This belief had long guided European planners who hoped ostensibly neutral economic benefits could build a consensus in favor of political integration. Political scientist Sophie Meunier has labeled this “integration by stealth.” 

Leaving aside whether any economic policy can be politically neutral, the decision to build a common currency without fully shared political sovereignty entailed significant risk — especially if a crisis exposed the political weakness before further integration took hold.

The architects tried to project optimism in everything from the choice of the euro’s name (more or less easily pronounceable in all EU languages) to the design of the bills (an emphasis on non-specific gates and bridges, symbols of connection), but that risk has always haunted the project.

The euro faced multiple competing pressures. The Germans wanted a currency strong and anti-inflationary as the Deutschmark, while France and Italy wanted one stable enough to attract investment but not so hard as to impede their traditional inflationary policies. 

The framers wanted convergence criteria emphasizing fiscal stability, which suggested only a few states would qualify. At the same time, the EU wanted to demonstrate the euro’s appeal by having as many countries as possible participate.

This led to countries such as Italy and especially Greece engaging in short-term creative bookkeeping to meet the criteria, even as their economic fundamentals remained shaky.

Although EU members are committed to eventual membership, the EU did not make euro participation compulsory even for those who met the original criteria, allowing strong economies, such as the U.K. and Sweden, to stay out. 

Furthermore, unlike EU membership, there is no formal process by which any member can either withdraw or be expelled, no matter what economic trouble they may cause after joining.

Europe has only one direction: forward; though the destination remains hazy. 

Has the euro “worked?” 

It depends on your definition of working. That it has survived two decades in the face of such risk is itself an accomplishment.

Has it become a significant part of the world economy? Yes. Its value having settled in a band between $1.10 and $1.15, it has become a stable global currency and has facilitated economic activity in both tourism and trade.

Greece, Portugal, Spain and Ireland gained access to credit they would likely not have achieved with their national currencies, while an export power like Germany has run up large trade surpluses without having to revalue. 

After the economic crisis of 2008-2009, however, the euro became a straitjacket for weaker economies, robbing them of the usual tools for debt reduction — inflation and devaluation — without offering a clear political system for transfers within the eurozone. 

Instead, resolution required tortuous negotiations, essentially to cajole the Germans into supporting a series of bailouts and debt modifications. Even as relative stability has returned, the Germans continue to resist common euro bonds, fearing they would put Germany on the hook for the debts of their neighbors.  

The result, as in many things European, is a strange hybrid. 

Although Eurosceptics denounce the EU as a superstate, in reality the euro and the EU still depend on negotiations among sovereign members. For better or worse, there is no democratically legitimate European-wide fiscal system, and the euro is still vulnerable to crises. 

In the current climate, marked by the ongoing Brexit soap opera, populist challenges to existing political parties and Angela Merkel’s long goodbye, more may not be possible.

French President Emmanuel Macron’s plans for deeper integration are much more rhetoric than reality. Moving forward is difficult, but no one wants to leave either. It appears the best anyone can hope for is for things to stay as they have been, crossing their fingers that the system can survive future crises. 

Thus, the euro’s birthday party is a bit muted. Its architects dodged difficult political questions, hoping they would eventually answer themselves. Perhaps they have, though the answers are not necessarily cause for celebration. 

Ronald J. Granieri is the director of research at the University of Pennsylvania’s Lauder Institute and a Templeton Fellow at the Foreign Policy Research Institute.