Twenty years ago, on Jan. 1, 1999, the euro was launched with the highest of political and economic expectations. Today, its 20th anniversary is being commemorated amid deep disappointment across Europe at both its economic and political results.
This has to raise questions anew as to whether the euro might have been fatally flawed from the start and whether it is likely to survive the next global economic downturn.
The euro’s architects had high hopes that its launch would substantially improve Europe’s economic prospects. By minimizing transactions costs, it was hoped that the introduction of a single currency would promote intra-European trade.
It was also hoped that by increasing competition among member states, the euro would force countries in the eurozone’s periphery to radically reform their unproductive economies.
Beyond providing economic advantages, the euro’s architects hoped that it would promote deeper European political integration and institution building. They also hoped that it would constitute a challenge to the U.S. dollar’s dominance as the world’s international reserve currency.
It would be an understatement to say that the euro has not delivered on its economic promises, especially since the 2008 Lehman Brothers crisis. Whereas over the past decade the U.S. economy has grown by some 15 percent, the overall eurozone economy has barely recovered its pre-crisis 2008 peak level.
Meanwhile, far from narrowing the economic disparity between the eurozone’s prosperous north and its sclerotic south, those disparities have been increased.
As an example, while Germany’s economy is now some 10 percent above its pre-2008 crisis peak, the Italian economy remains around 5 percent below its peak. This is not to mention the Greek economy, which is barely recovering from an economic depression that has been worse than that experienced by the U.S. in the 1930s.
As to the hope that the euro project might have promoted political unity and harmony, it would seem that it has done just the opposite. Those countries in the eurozone’s economic periphery deeply resent the austerity that has been imposed on them by the prosperous north in general and by Germany in particular. They blame that austerity for their poor economic performance.
At the same time, those countries in the prosperous north have grown increasingly resentful of having to bail out a European economic periphery that they believe has been too slow to reform its wayward economic ways.
More disturbing yet, especially since 2008, Europe’s poor economic performance has undermined public confidence in Europe’s political elite thereby contributing to a wave of populism across the continent.
Most recent examples of this populist trend have been the rise of the "yellow vest movement" in France, the coming to power of the Five Star Movement and of The League in Italy and the waning of Angela Merkel’s political star in Germany.
In the run up to the euro’s 1999 launch, American economists like Milton Friedman and Martin Feldstein presciently warned of the great risks of attempting economic union before attaining political union.
They also noted that the eurozone was not an optimum currency area especially in the sense that it lacked labor mobility or a centralized fiscal authority to make it work.
Over the past decade, the eurozone’s experience has also underlined the inevitable tensions that would rise from locking in a monetary union a country like Italy that had a poor productivity record with a productivity powerhouse like Germany.
Without the ability now to regain competitiveness through currency devaluation, Italy was bound to progressively lose competitiveness to Germany, which in turn was bound to result in disparate economic performance between those two countries.
The fundamental flaws in the euro currency arrangement, which became all too apparent during the eurozone sovereign debt crisis, have been papered over to date by the forceful action of the European Central Bank (ECB).
In mid-2012, at the peak of the crisis, the ECB declared that it would do whatever it takes to keep the euro from failing. It backed up this statement by action, first by the introduction of an Outright Monetary Transaction Program and then by a massive round of quantitative easing.
Sadly, a number of countries in the eurozone periphery, and most disturbingly Italy, did not take advantage of a favorable global economic environment to reform their economies or to reduce their excessively high public debt levels.
This leaves those economies very vulnerable to another round of the debt crisis in the event of another global economic recession. This would seem to be particularly the case now that the ECB has ended its bond-buying program and now that resistance is growing in Germany to any future bailout programs for countries in the eurozone periphery.
One has to doubt whether the euro’s architects would have launched the single currency in 1999 had they known as we know today how troubling the eurozone’s economic and political developments would have been over the subsequent two decades.
With little reason to believe that there will be a material change in the eurozone’s economic and political developments in the years to come, there is strong reason to doubt that the euro will make it in its present form to its next 10-year anniversary.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.