From The Economist, January 5th, 2019
The euro is a survivor. The new currency, brought into being on January 1st 1999, has defied early critics, who thought it doomed to failure. It has emerged from its turbulent teenage years intact, cheating a near-death experience, the debt crisis of 2009-12. It is now more popular than ever with the public. But fundamental tensions attended its birth. Although the euro has made it this far, they still hang over it. If Europe’s single currency is to survive a global slowdown or another crisis it will require a remodelling that politicians seem unwilling or unable to press through.
To its supporters the bold economic experiment was the culmination of half a century of European co-operation and a crucial step towards an “ever closer union” that would unite a continent once riven by conflict. “Nations with a common currency never went to war against each other,” said Helmut Kohl, Germany’s chancellor who, together with France’s president, François Mitterrand, championed monetary union in the 1990s to cement deeper political and economic integration.
Each member brought its own hopes and fears to the union. To the French it was a way of taming the economic might of a newly reunified Germany and the power of the Bundesbank. To the Germans, who feared they would eventually foot the bill for profligate southerners, the prize was a stable currency and an end to competitive devaluations by Italy. To the Italians, Greeks and other southerners, monetary union was a means of borrowing the inflation-fighting credibility of the Bundesbank, on which the European Central Bank (ecb) was modelled.
The most vocal critics of the euro—many in America—saw a foolhardy plan crafted by naive politicians. The currency union would shackle together economies that were too different in structure while taking away a weapon to fight “asymmetric” downturns that hit individual members, such as a local housing bust. By giving up the ability to devalue currencies, the only way to adjust would be through painful and politically troublesome cuts to real wages. Unlike America, which also shares a monetary union, there would be no federal budget to help stabilise demand across state borders. Milton Friedman gave the euro no more than ten years before it collapsed and took the eu with it.
Neither its staunchest advocates nor its harshest critics have proved correct. The currency area has grown to 19 countries and ranks as the world’s second-largest economy, when measured using market-exchange rates, behind only America. But the euro has only muddled through. Political will, particularly at its Franco-German core, meant that just enough was done to ensure that the euro survived the debt crisis but none of the union’s fundamental problems was solved. As it enters its third decade, the question is whether the currency can withstand the next upheaval.