by Roy C. Smith
The euro and its companion institution, the European Central
Bank (ECB), are products of the Maastricht Treaty of 1992, approved by the 18 EU
member countries at the time, with three “opting out” of adopting the new
currency. On Jan. 1, 1999, the euro was introduced as an “accounting currency” (with
notes and coins arriving three years later). On the same day, Credit Lyonnaise,
the largest French Bank run by the former head of the Treasury, announced in
full page adds all over the world that it was already, and prepared to
remain, the largest bank to the euro community.
The 1999 Nobel Prize in Economics was awarded later in the year to
Canadian Robert Mundell (the only well-known North American economist to
support the euro – Milton Friedman gave it no more than ten years in which to
collapse). Credit Lyonnaise did collapse
in 2003 as a result of too much over-eager lending and too many overpriced
acquisitions.
So, right from the beginning it was a mixture of wishful
thinking, fanfare, and fundamental misconceptions. It didn’t follow monetary
traditions, or economic theory, and the political justification for joining varied
widely among member countries. But, it happened.
Its chief sponsors were German Chancellor, Helmut Kohl, and
French President Francoise Mitterrand. For them this was the natural follow on
the Single Market Act (1986) that would bind EU countries together economically
to make another war between them impossible. But the binds were imperfect
because the EU was unwilling to shed national sovereignty to the extent
necessary to for a real economic “union” (like the US). The Treaty provided for
“monetary union” (currency, interest rates) but no “fiscal union” (taxation and
budgetary powers), and expressly rejected the notion that countries could be
called upon to assist other member countries. So, the linkages of the EU were
never destined to be more than those of a “confederation of states” (e.g.,
similar to the loosely bound, ineffectual united states that preceded the
signing of the US Constitution in 1797).
But among the wishful thinkers were those who saw a
different future for Europe. They saw a base of free-market democracies
expanding to form a more competitive, energetic private sector and making the
association available to all or many of the 29 countries of the USSR and the
Soviet Bloc that were forming anew after the collapse of the Soviet Union in
1991. They also saw that the rule making
and enforcement powers of the EU Commissions, and of the new ECB, would begin
to force all the member states to converge into less interfering and subsidizing
economic bodies that would have to compete with each other for workers and
investment capital, which under the Single Market Act, could move wherever in
the EU they wanted. The more of this, the healthier the system they were trying
to create would become.
In the first decade of its existence, the euro faced a
number of painful shocks – two financial crisis that affected the real economy
significantly; Islamic terrorist attacks after 9/11 that opened a floodgate of trouble - the Arab Spring, ISIS, several civil wars,
great instability and massive illegal migration to Europe from the Middle East; and a “hollowing
out” of European manufacturing jobs due to Chinese and other imports. But
despite these shocks, the interest rates on all member country government bonds
were very close to the rates charged on German bonds for a decade, despite
substantial credit differences between them.
The market believed that despite no obligation to assist each other, the
euro countries would do just that if necessary. This proved to be true in 2010
when the EuroArea (EA) bailed out Greece, Portugal, Ireland and Cyprus after
the banking crises in these countries overwhelmed them. Further, abundant
market liquidity was supplied by the ECB during the crisis as necessary to
resolve it. All of this was done with the reluctant, step-by-step approval of
the northern EA countries, ever fearful that their southern neighbors would
suck them dry. Indeed, all of the recipient countries, despite stormy political
changes, agreed to tough conditions that they have followed (more or less) and
have made reasonable recoveries since.
Indeed, the sovereign debt crisis frequently raised the
question as to whether Greece (GREXIT) or Germany (GERXIT) would be better off outside
the euro than in it. By leaving, Greece would consign itself to being a
developing country again, would have to devalue its new currency from the euro,
but still bear the burden of the euro-denominated debt it undertook from the
EA. The cost of imports (Greece imports much of its food, clothing, energy and
manufactured goods) would rise, but its export businesses are largely confined
to tourism and agriculture and would lag behind.
If Germany were to leave, its currency would revalue, making
exports more expensive and as Europe’s largest exporter, especially within the
EA, it would cause a significant slowdown in Germany’s growth rate. Germany’s
departure would very likely bring an end to the euro, which would have a
variety of unwanted consequences, including perhaps, also bringing an end to
the EU.
Arguably it should be easier to leave the EU than the euro,
which has additional complications. The UK’s experience in attempting to leave
the EU however, has shown how difficult and potentially harmful to its economy leaving
the EU would be.
Meanwhile, the euro ticks along, being widely accepted by 340
million EA citizens, and by global financial markets. It is the only
alternative to the US dollar, it is the second most traded currency in foreign
exchange markets and the second largest reserve currency with €1.2
trillion outstanding at the end of 2018.
The euro was never designed to be perfect. Just adequate to
hold what union there is together. So far, so good.
