Mariella Radaelli and Jon Van Housen :
The success of the euro requires political and fiscal union, certainly an increased role for fiscal policies to help growth and stimulate employment as well as sharing of debt. Twenty years ago, Europe had a common currency for the first time since the end of the Roman Empire. It was an economic experiment of unprecedented scale that carries on until today with its benefits as well as systemic flaws.
The single currency was adopted as a currency peg at midnight on January 1, 1999, and on New Year’s Day 2002 it was adopted as an actual physical monetary system in 12 countries. It first was introduced in the original Eurozone members: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Spain and Portugal. And later Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania, too, adopted it over the years.
Now the euro is the second-most widely used currency in forex trading after the US dollar. Around 340 million Europeans use the currency, and it is a de- facto legal tender in a number of other regions. Countries outside the EU include the French overseas departments of Guadeloupe, Guyana and Martinique in the Caribbean as well as Mayotte and Réunion in the Indian Ocean. Fourteen African nations have also pegged their currency to the euro. The euro was largely deemed successful in the beginning, generating hope, expectations and economic enthusiasm.
For the first few years, the Eurozone flourished with adequate growth and inflation within the European Central Bank’s target rate of two per cent. The figures were positive, though they concealed growing structural tensions.
The interest rate set by the ECB tended to be one that made more sense in Germany, the economic powerhouse of the Eurozone. In those years, low interest rates helped keep money cheap and the value of the euro low. That benefitted Germany but damaged weaker countries that progressively found themselves in dire straits.
“For 20 years, the euro has delivered prosperity and protection to our citizens,”
European Commission President Jean-Claude Juncker tweeted a few days ago. That might be true for some, but the reality is that poverty is rising on a continent where countries move at different economic speeds. Instead of ‘Unity in Diversity’ – as the English translation of the EU’s Latin motto In varietate concordia states – members are divided over what makes a fairer Europe. Some citizens feel they are living in a monetary straightjacket. But surprisingly, most are still fans of the euro. Two of the three euro-citizens still favour the common currency, as per a survey by Bloomberg.
Yet many EU nations are struggling to understand how euro can give better results, especially in view of burgeoning levels of debt over the past 10 years. And the era of quantitative easing (QE) is over for now. On January 1, ECB brought down the curtain on its stimulus programme that has pumped in almost ?2.5 trillion in bond purchases since 2015. What will be the consequences on the weakest economies?
“The end of QE does not mean a total disengagement from the ECB,” says economist Mario De Aglio. “Faced with strong instability due to some Eurosceptic forces, the ECB will continue to act to defend the euro.”
The single currency is fundamental to the functioning of a single market: It fosters trade integration and prevents competitive devaluations. But its creation without institutions that enable a region as diverse as Europe to function effectively was a serious mistake. The success of the euro requires political and fiscal union, certainly an increased role for fiscal policies to help growth and stimulate employment as well as sharing of debt.
“The single currency will never work equally for all the member states until the unification of tax legislation is completed,” says political scientist Roberto Marchesi.
“The loss of monetary sovereignty creates serious imbalances in countries forced to follow a change in their currency that is not directly related to the performance of their economies.”
The euro is “the craziest thing that Europeans have built together – and the most utopian,” writes an economist from Le Monde.
Sure enough, Germany has been the principal beneficiary. But also Finland, Austria and even the heavily indebted Belgium performed better in managing the 2008 economic crisis by adopting the euro. The benefits of monetary union were irrelevant for France and Italy, two of the six founding members of the European Union. Other troubled southern economies such as Spain, Malta and Cyprus have been mediocre in growth and performance. There is no easy way to raise competitiveness other than implementing structural reforms that some countries have so far avoided.
Considering the present scenario, one is reminded of Margaret Thatcher, who now seems prophetic about the failure of a single currency. In a speech before Britain’s House of Commons in 1990, the former British Prime Minister was opposed to the idea of giving up the pound for a single European currency. “Germany will show its historical phobia for inflation and less productive southern European countries will have problems remaining competitive with a strong currency, and there will be tensions,” she said. A few weeks later she resigned from the premiership.
In the recent past, the UK has taken a firm course. But now after Brexit, can the Eurozone pursue full fiscal union?
(Mariella Radaelli and Jon Van Housen are editors at www.luminosityitalia.com news agency in Milan)
