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Happy Birthday to Euro

20 years of Europe’s systemically flawed currency show we must apply the lessons of the last crisis and ensure more integration between the wealthiest and least wealthy Members

Throughout its 20-year history, the Euro has been depicted as a crucial element of the development of the European Union. It was supposed to strengthen the European economy, bring EU Member States closer together and increase EU citizens’ prosperity. Yet, after the economic crisis in 2008/09 experienced by the southern Member States and Ireland, the reputation of the Euro was undermined and its weaknesses brutally revealed.

By Anna Jermak

Love it or loathe it – what it is

The Euro is the official currency of 19 of the 28 EU Member States, used by more than 339 million people, and the second-largest currency in the world (after the US dollar). It was introduced by the 1992 Maastricht Treaty as part of the Economic and Monetary Union (EMU), involving the coordination of economic and fiscal policies, a common monetary policy, and a common currency. The Euro was launched in 1999 and three years later came into circulation.

Big dreams – how it all began

In order to understand the reasons for the introduction of the current European currency, the Euro, one needs to go back to the 1950s, and the genesis of the European Economic Community (1957), when the European leaders first talked of the creation of the single market with free movement of trade, services, capital and persons. The common currency, together with common monetary policy and co-ordinated economic and fiscal policies, was essential for its completion. There was no space for multiple small and vulnerable currencies in the fast-developing business world – a single currency, as presented by the 1989 Delors Report, was the capstone of Europe’s single market. Indeed, one large Euro market would enhance European economic integration, stability and growth. As there was no need to exchange currencies in the Member States which adopted the euro, both consumers and traders were provided with greater confidence, opportunity and security. The adoption of the common currency also strengthened the EU’s position in the global economy.

However, leaders like French President Francois Mitterrand and German Chancellor Helmut Kohl also believed that a single European currency would apply irresistible pressure for political integration. It would lead eventually to their ultimate goal: a European political federation akin to that of the United States. They saw that to function smoothly, monetary union requires a banking union – a single supervisor for all the banks and a union-wide deposit insurance scheme. Otherwise, banks overseen only by their national supervisors would be allowed to undertake cross-border lending operations irrespective of the impact on neighbouring countries. And in the absence of a union-wide deposit insurance scheme, a run on the banks in one country could infect the banking systems of others.

Furthermore, to operate smoothly, a monetary union requires an integrated fiscal system, like in Australia and the US. States that give up their monetary policy to a higher authority can no longer adjust it to suit domestic conditions. They can no longer lower interest rates to encourage investment when the national economy slows. Of course, if the partners operate an integrated fiscal system, prosperous members can shift resources to depressed regions, compensating for the impossibility of interest-rate cuts. The problem is that banking and fiscal union will only be regarded as legitimate if those responsible for their operation can be held accountable for their decisions by citizens. That prompted a logic for more power for the European Parliament – and less for national legislatures.

Monetary integration creates a certain logic and associated irresistible pressure for political integration. But the politics of Europe and the world since 1992 militated against political integration. Without it, the unreadiness of the EU for a common currency back in 1999 was an accident waiting to happen. Some economists did predict this. For instance, it had been predicted by economist Martin Feldsted two years before in an article in Foreign Affairs magazine:

In the beginning, there would be important disagreements among the EMU member countries about the goals and methods of monetary policy. These would be exacerbated whenever the business cycle raised unemployment in a particular country or group of countries. These economic disagreements could contribute to a more general distrust among the European nations.

The ugly truth

The Euro duly imploded as 2008 turned into 2009 when Greece, Spain, Portugal, Cyprus, Italy and Ireland were almost destroyed economically as part of the price for being parts of the Eurozone. The impetus for the debt crisis within the Eurozone was the banking crisis in the US in 2007/2008 – 2009. It affected the global economy, and European countries were not exceptions. Greece, previously so desperate to become the twelfth member of the Eurozone, has suffered the most. Its fraudulent entry, lack of fiscal reforms and unsustainable budget deficits made its debt so large that it exceeded the size of its whole economy. As the banking systems within the Eurozone had become much larger and mightier than their host economies, the Greek government was in practice unable to rescue national banks or to pay debts without the assistance of the European Central Bank, International Monetary Fund or the EU. Austerity measures were introduced, leading to national protests, riots and anti-EU sentiment.

In Ireland – the first Eurozone State that fell into recession – the crisis was aggravated by the bursting of a property bubble, which caused loan defaults. In order to rescue Irish banks which had financed properties through now precarious loans, the government took on their debts. That led to the deficit, public spending cuts and tax increases, and left the government in Dublin with no option but to join the EU and International Monetary Fund bailout programmes. The debt crisis followed a similar course in the rest of the countries, although on a smaller scale. In effect, a banking union – a single supervisor for all the banks and a union-wide deposit insurance scheme – was introduced in 2012. It prevented banks overseen only by their national supervisors from undertaking cross-border lending operations irrespective of the impact on neighbouring countries, and from infecting the banking systems of EU countries by a run on the banks in others.

The European Central Bank independently set an identical economic framework and monetary policies in the whole Eurozone, without taking into consideration the individual needs of the Member States and differences between their economies (especially between Northern and Southern States). John Authers’ example of Spain and Germany demonstrates how irresponsible such measures were. Although these two countries had different levels of inflation (in Germany it was twice as high as in Spain) and needed different interest rates, the ECB set interest rates that suited Germany, the biggest member of the EU. As Spain (and other weaker Eurozone States) gave up its monetary policy to a higher authority, it could no longer adjust it to suit domestic conditions or lower interest rates to encourage investment when its national economy slows. And although such an integrated fiscal system enabled the prosperous members to shift resources to depressed regions and compensate them for the impossibility of interest rate cuts, they did not do so. Consequently, weaker Member States were the ones forced to bear the burden of adapting to the existing economic arrangements and the ones more prone to economic shocks and financial instability.

To progress, or not to progress…

Although all the countries eventually exited the bailout programs, it lasted too long, and bitter memories of the euro’s failure still remain. Greece became economically fully independent barely a few months ago, its battle having lasted for nine years. Cyprus ceased to rely on the EU financial assistance programme as recently as 2016, Portugal and Spain in 2014. Ireland was the fastest one and exited the EU and IMF funding in December 2013. Italy, which managed to avoid a bailout, paid a price in low real GDP that was the same in 2016 as it was in 2001. The disappointment of EU citizens with how the monetary and economic integration within the EU were handled in practice militated against proceeding with even deeper European integration, and questions as to whether not just the Euro but the EU as a whole can ‘be saved’ at all, started being asked.

According to Andrew Lilico, the managing director of Europe Economics, Euroscepticism in fact suggests the need for more integration and faster progress within the EU. Without political union and closer economic integration (inter alia through centralised fiscal transfers and the Eurozone’s own tax stream), the Euro crisis is very likely to return, this time destroying the EU. Joseph Stiglitz – a Nobel laureate in economics – considers the Euro may be approaching another crisis. In his opinion, it can only be avoided if lessons are learned from the previous one – strong countries must take on the burden of adjustment to misaligned interest and exchange rates from poorer ones, already struggling with unemployment and low growth rates. Although taxpayers in rich Member States like Germany are likely to object to payments to the other Member States (like it happened during the bailout), that seems to be the only reasonable and far-reaching solution. Otherwise, public support for the EU will keep diminishing, Euroscepticism and anti-German sentiment will keep growing, more anti-EU national governments (like the Italian one) will come to power and other ‘Brexits’ will take place. Deeper political integration within the EU and more flexibility from Germany and other most powerful Member States are then crucial for the future of the Eurozone and the EU.

Too afraid to join the club?

As the economic situation in the EU is fractured with a weakening currency and decreasing public support, it is understandable that nine Member States still have not made the decision to adopt the euro. Let’s not forget, though, that for all the non-Euro countries, except for Denmark and the UK which opted out, joining the Euro is compulsory under the Maastricht Treaty, provided that applicable criteria are complied with. These include: a budget deficit of less than 3% of their GDP, a debt ratio of less than 60% of GDP (both of which were ultimately widely flouted after introduction), low inflation, and interest rates close to the EU average. Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania and Sweden are therefore obliged to adopt the euro, yet only three of them have justifications for their evasions.

What are the reasons then – apart from the 2008/09 debt crisis – for postponing Eurozone membership for those countries? The attitudes in the Czech Republic and Poland reflect the positions of governments of those States which are against the adoption of the euro. Particularly the Polish conservative government has been known for its subversion of EU values and open disdain towards the EU institutions. Similarly, Hungary’s leading Eurosceptic party keeps postponing the adoption of the Euro. In Sweden, on the other hand, although the government is in favour of the adoption of the single currency, it feels obliged to follow the result of the referendum held in 2003, in which 56% of Swedes voted against the euro.

The situation differs in Bulgaria, Croatia and Romania. The two first countries are willing to join the Eurozone as soon as they satisfy all the Euro convergence criteria, but they are yet to comply with two out of four of them. Romania also plans to join the euro, but economic unreadiness has stopped it, so it cannot be expected to join the Eurozone any time soon. Unsurprisingly, none of the States which opted out is likely to adopt the Euro – the UK because of Brexit, and Denmark due to strong public nervousness about the Euro after the debt crisis. In this way, we have ended up in a vicious circle – because of the past crisis many Member States are afraid of closer economic and monetary integration, which leads to a higher risk of another crisis.


The Euro was undeniably an ambitious and – to a large extent – necessary project. It took European integration one step further, in fact – further than any other developed union or community has ever come. It cannot be forgotten that all previous European trading blocks and confederations eventually came to an end, yet the EU has still held on, for over 60 years. Unfortunately, the implementation of the Euro was also rushed and blind to the pivotal element of European political integration. Continued well-thought-out integration and flexible economic mechanisms aimed at more vulnerable States are essential to avoid another even deeper descent for the Euro and could be a good start to another chapter in the history of the EU. This time, without a crisis.

Anna Jermak is an LLM student at the University of Amsterdam.