The Euro at 20: Looking to the Past to Carry on in the Future
December promises to be a busy month for EU leaders, with one final summit to squeeze in before they head home for Christmas. Apart from agreeing on a road map for the common deposit insurance scheme not much else is expected from the final gathering of 2018. Time then to reflect on lessons learned regarding the euro, a common currency that turns 20 on January 1st.
Lesson №1: Love-Hate = Business as Usual
While some Europeans regard the euro as a success story that has contributed to the creation of a single European identity, others view it as “the cause of all evils” including austerity, stagnation and unemployment. In recent years, Eurosceptics have blamed the single currency for increasing the price of a baguette, lowering export capabilities, creating a housing bubble and causing the most severe financial crisis since 1929.
The European Parliament’s Parlemeter 2018 survey nevertheless shows that support for the euro is at its highest since 2004, with 61% of respondents from all EU countries in favour of the common currency. This level increases to 77% among eurozone states, up three points from March 2018. Both findings suggest that many Europeans do not necessarily view the currency as an economically flawed initiative.
And with good reason. The single currency means no more charges for converting currencies or withdrawing money in another eurozone country. Businesses benefit from the absence of exchange-rate risks or transaction costs for cross-border operations. It is easier and cheaper on average to borrow money from banks or other sources. Since its introduction, the euro has done a pretty good job at keeping prices stable in the eurozone (particularly between 2011 and 2016) and inflation at around 1.5%. It’s also not doing too bad against other currencies given that it is currently the second most commonly held reserve currency, comprising approximately 20% of allocated reserves.
Lesson №2: Be Prepared
From the outset, Economic and Monetary Union (EMU) was regarded as an EU-wide policy accompanied by temporary derogations and permanent opt-outs. According to the official narrative, the eurozone takes the EU one step further in its process of economic integration, while the integrity and coherence of the EU remains intact. This effectively means that while states such as Denmark and the United Kingdom have decided to ‘opt-out’, they nevertheless retain the right to apply for membership of the euro area. Moreover, if ‘newer’ EU states fulfil so-called ‘convergence criteria’, they too can join the club.
Theory is one thing, practice something else. In the decade since the last global financial crisis, eurozone members have been locked in a north-south ‘’blame game’’ while non-eurozone countries have become more reluctant to take their fair share of political responsibility for the fate of EMU. Moreover, while some observers regard the establishment of a eurozone budget as another step towards political and economic integration, others warn that it might further divide EU member states. While a separate eurozone budget will enhance cooperation among members it also risks placing ‘the rest’ into a different category of membership.
To sum up, eurozone states must take into account concerns regarding the creation of a two-tier Europe and think creatively as to how to address them. This must be accompanied by renewed efforts to overcome institutional weaknesses and complete a governance architecture that better protects the European economy in the event of another crisis. For their part, non-eurozone countries should get used to the fact that cooperation among euro member states is deepening. The recent Franco-German proposal on the architecture of a eurozone budget within the framework of the European Union is a case in point.
Lesson №3: ‘’If the Euro Fails, Europe Fails’’
It is worth mentioning here that the desire for a common currency was not present from the very beginning of the European project. Indeed, talk of deeper integration and the euro can originally be traced to statements made by the European Commission in 1962 when it first formally proposed a single European currency. Thirty years on, the Maastricht Treaty laid the foundations for the euro and promised to make progress towards fulfilling the parallel objective of political union. This is why German Chancellor Angela Merkel has repeated stubbornly since the first bailout of Greece in 2010 that “if the euro fails, Europe fails”.
However, the problem today is that some member states cannot decide whether the euro keeps the eurozone together or is laying the foundation for further crises or division within the EU. Wrestling with this dilemma has not been helped by criticisms that, rather than unifying Europe, the common currency has essentially become its seedbed. Euroscepticism has also heightened concerns that Brexit might be followed by further departures, undermined calls for deeper integration, and cast doubt over more convergence.
What’s abundantly clear is that states know that the cost of leaving the eurozone will be extremely high, not to mention a potential source of instability for the whole of Europe. It’s in their vested interest to make an extra effort to safeguard the existence of the euro. Let’s hope that much-needed eurozone reforms see the light of day sooner rather than later.
Eurozone members should enter 2019 intent on increasing support for the common currency. They will do their cause no harm by collectively responding to growing concerns that the EU is currently defined by a North-South-East-West divide. In addition, the eurozone needs to create an architecture that’s aligned with its respective economies and capable of better protecting the European economy in the event of another crisis. Finalising the joint deposit insurance scheme, completing a banking union and — more ambitiously — implementing a large scale eurozone budget will go some way to making this happen.
Note: This article is published within GLOSBEC DIFF GOV — „European Governance: Potential of Differentiated Cooperation“ project supported by Jean Monnet Activities of the EU Programme Erasmus+.
The European Commission support for the production of this publication does not constitute an endorsement of the contents. which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.
This article was originally published on our Medium page.