The first euro banknotes and coins entered circulation 20 years ago. Although the exchange rates of almost all participating countries had already been fixed two years earlier, only the introduction of the euro marked the irreversible economic integration of Europe. Because after the creation of the single monetary policy and the introduction of hundreds of tons of euro cash, a return to national currencies would have ended in disaster for the European Union and its member states.
The global financial crisis and the euro crisis have shown that the single market will not work without the common currency, the euro – one of the reasons being the differences in exchange rates. Even if the euro has not displaced the dollar from first place in the world monetary system, it protects European economies from external shocks, that is, from the negative impacts of the world economy.
Are you ready for the collapse?
Additionally, monetary integration has shown its benefits during the COVID-19 pandemic. Without the euro, some Member States would not only face a supply and demand crisis, but also a severe weakening of their currencies, which could even lead to a currency crisis. This would make the fight against the pandemic and support for employment with public money extremely difficult.
EU citizens seem to appreciate the stabilizing effect of the common currency. According to the Eurobarometer survey of May 2021, 80% of those questioned think that the euro is good for the EU; 70% think the euro is good for their own country.
In addition, membership of the euro area is seen as attractive: Croatia will most likely join the euro area in 2023. Bulgaria also aspires to join. Due to the decline in confidence in the currencies of Poland and Hungary, the introduction of the euro could become a realistic scenario in the event of a change of government in these countries.
A long list of reforms
Despite these developments, many problems in the euro area remain unsolved 20 years after the change of currency. The fundamental dilemma is between risk sharing and risk elimination. The question is how many more structural reforms Member States need to undertake before deeper integration of the euro area, which implies greater risk-sharing between Member States, can take place. In the banking sector, for example, the challenge is to improve the financial health of banks, that is to say, among other measures, to increase their capitalization and to reduce the level of non-performing loans before a common deposit insurance system can be created.
A second problem is the relationship between monetary policy and fiscal policy. Currently, the European Central Bank is the main stabilizer of the euro area’s public debt, which has risen considerably due to the pandemic, and it will remain so by reinvesting its holdings in government bonds until at least 2024. However , an alternative solution is needed to stabilize the euro area debt market.
Joint debt guarantees, as recently proposed by France and Italy, must be combined with incentives to modernize the economies, especially those of the southern euro countries. In this context, it is important to keep in mind the limits of fiscal policy, which is now too often seen as the magic cure for all economic policy problems. The question of the number of rules and the degree of flexibility needed in the euro area is linked to fiscal policy.
Lively discussions are expected this year on the corresponding changes to the budgetary rules. Indeed, there is a great deal of mistrust between the countries of the north and the south of the euro zone, which is mainly due to the different levels of performance of the economies and to the differing views on economic policy. Persistent inflation and problems implementing the NextGenerationEU stimulus plan, which is supposed to cushion the economic and societal damage linked to the coronavirus, could exacerbate disparities in economic performance and therefore also disagreements within the euro area.
The euro crisis has shown that turmoil in one Member State can have fatal consequences for the entire currency area. In the years to come, however, the biggest challenge for the euro area will not be the situation in small member states like Greece, but in the largest of them. The economies of Italy, France and Germany, which account for almost 65% of the euro area’s gross domestic product, are difficult to reform with their complex territorial structures and growing political fragmentation. At the same time, these economies lack real convergence.
A decisive factor for the further development of the euro currency project will be whether the transformation of their economic models is successful under the influence of the digital revolution, the climate crisis and demographic change.
*[This article was originally published by the German Institute for International and Security Affairs (SWP), which advises the German government and Bundestag on all questions relating to foreign and security policy.]
The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Fair Observer.