Analysis FAES The euro turns 20 years old

Román Escolano Olivares is a Commercial Technician and State Economist. Former Minister of Economy.

 


Twenty years, as the tango says, is nothing. Although there is already a whole generation of young Europeans with no memory of the old national currencies, the euro is still a newcomer. Two decades ago now, on 1 January 1999 –it would still take three years to use euro notes and coins in everyday life– the so-called “third stage” of the Economic and Monetary Union (EMU), agreed in Maastricht, culminated and the current era of European monetary integration began.

It is a short time in historical perspective, but enough to allow a first assessment of the time elapsed. Let us look back to 1991. The monetary design agreed in Maastricht responded first and foremost to the concerns of those years immediately after the fall of the Berlin Wall. Firstly, the fight against inflation: since the inflationary crisis of the 1970s, ensuring price stability –with a currency at least as solid as the best national currencies– was an unavoidable objective, particularly in Germany. This priority had an impact on differential elements of the EMU such as the extraordinary degree of independence of the European Central Bank, the strict definition of its mandate, or even technical aspects of monetary policy inherited directly from the operations of the Bundesbank.

On the other hand, the inertia dragged by the old European Monetary System (EMS). The architecture agreed at Maastricht, it should be remembered, was not incompatible with a continuation of the essential scheme of the EMS: a single currency reserved for a central “nucleus” of five or six countries (essentially, the former “Framework Area” plus France), with the possibility of maintaining a multi-speed system for the rest of the Member States for an indeterminate period of time.

The consequence of all this is that the euro was born with a very well-developed monetary side (around a strong Central Bank and with a very explicit anti-inflationist commitment), but without having other basic elements for financial stability such as supervision or common bank restructuring mechanisms; in short, an architecture closer to a system of fixed exchange rates rather than to a real Monetary Union. As the Eurozone was born –largely due to the dynamics created by the budgetary rigour of Aznar’s Spain– larger and more diverse (with twelve members), these design defects would end up taking their toll in the future.

However, the first decade of the euro developed in a relatively placid manner, with the notable exception of the Stability Pact crisis involving Germany and France in 2003, which dealt a serious blow to the credibility of the European system of fiscal rules, although its significance would not be fully gauged until the subsequent arrival of the “Great Financial Crisis” in 2008.

The second decade was much more complex. The outbreak of the international crisis exposed the original shortcomings of the EMU. A budgetary crisis and the subsequent restructuring of debt in a small country (with only 2% of the total GDP of the Eurozone) was enough to trigger a series of national “vicious circles” between banking risk and sovereign risk, which led to the fragmentation of capital markets, the sudden closure of access to finance in several Member States and the emergence of the “redenomination” risk or, in other words, the rupture of the euro.

The political response, since the Euro Council of 29 June 2012, was, in the typical European way, late and, in many cases, insufficient. But the euro has come out of its first major crisis alive, and European political leaders have maintained throughout the period a remarkable political commitment to the single currency. Since then, institutional elements have been put in place that previously seemed unbearable. It is worth remembering that, at the time of Draghi’s speech in London (July 2012), neither the MEDE, nor the Single Supervisory Mechanism, nor the Single Resolution Board existed, and the expression “Banking Union” was not even used.

Now the euro is entering its third decade and, despite all that has happened, I believe it is doing so in a cautiously optimistic way. Critical or sceptical analyses abound on this anniversary, but they should not surprise us: they have accompanied us from the outset, particularly among economists. Milton Friedman once said that the euro was a construction destined to fragment and disappear; Martin Feldstein went so far as to say that the tensions stemming from the euro could lead Europe into a new war.

The reality today is that the euro, according to Eurobarometer data, is considered positively by 74% of Europeans, the highest level of satisfaction since its creation. The single currency has given the European economy more than reasonable economic results. The level of inflation in the Eurozone in these twenty years has been lower than that of the Federal Republic of Germany in its previous two decades, and the ECB has been able to fulfil its mandate of price stability on a regular basis. On the other hand, and despite Europe’s slow exit from the crisis, per capita GDP growth has been similar in the United States and the Eurozone during this same period.

But it is clear that the monetary stability provided by the euro is not in itself a guarantee of economic success, nor can it be an alternative to reforms. Sharing the same currency and the same tailwind, the evolution has been much better in those countries that have reformed their economies (such as Germany, Ireland or Spain) than in those that have shown reformist paralysis, such as Italy or France. Stability and reforms continue to be the best economic recipe we have.

Twenty years is indeed nothing. The euro is still a young currency. It took much longer than two decades for the United States to implement its own monetary integration. The single currency was born, in Draghi’s recent words, as “protection” for the Single Market and, to that extent, as an anchor for the political project of European integration.

With all its limitations, it seems clear that it has fulfilled its role well. Now, in the face of a more uncertain economic scenario, it is essential to complete the missing elements in its financial and banking architecture. Progress is insufficient, but the necessary elements are known and well identified. This must now be our absolute priority. In another twenty years, we will be celebrating the 40th anniversary of one of the best achievements of the European project.

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