Ten years after its triumphal inauguration, the European single currency now finds itself at the centre of the worst financial crisis in half a century.
Introduced in 2002, the euro soon became the most tangible symbol of the great continental single market and of the process of bringing together the peoples of Europe.
“The euro has been the most outstanding success in the process of European integration,” the European Commission proudly announced in 2007. This claim rings a bit hollow these days, when the EU is languishing in what has become known as “the euro crisis”.
We should not forget, however, that the single currency was a major achievement by which Europe took a giant step forward out of the nationalism and warfare of the last century, uniting the European peoples in a great common endeavour. Together with the opening of borders and the free movement of people, the euro symbolised a new era of economic and social cooperation.
And the successes are undeniable. The euro has given back economic weight to Europe in a world more and more dominated by large blocs. Today the European currency is the second most frequently traded currency on international markets, with a share equal to 40 per cent of all daily transactions. A quarter of international currency reserves are held in euro.
Also undeniable are the advantages the single currency has brought to a European population of 330 million people: an end to the nuisance of changing money, facilitation of commercial exchanges, transparency of prices, and monetary stability. Switzerland too has profited considerably from the euro, since - until recently - its exports have been favoured by a currency strong enough to keep up with the Swiss franc.
The debt crisis has evolved into a crisis of the euro, which has made dark clouds appear on the European horizon. There seems to be something rotten in the grand project of monetary union.
“A monetary union can be a dangerous thing, if it is not built the right way. It’s not like the free movement of people or free trade agreements, where you can always make adjustments later,” cautions Tobias Straumann, who teaches economic history at the universities of Basel and Zurich.
“With a monetary union you create economic and institutional links that are very strong, almost unbreakable. All you have to do is make one or two mistakes at the outset and you can get yourself into a disastrous situation.
"And that’s what we’re seeing right now: the euro project, which was supposed to bring the nations together, has precipitated itself into a crisis that is giving new life to nationalism and division.”
Too much of a hurry
So what mistakes were made? For Straumann, monetary union was too ambitious and happened too fast.
“I’m not saying they should have given up the idea of a single currency altogether. But monetary union needed to be built much more slowly, beginning with the economically strongest nations, and with the prospect of bit-by-bit enlargement."
The introduction of the common currency not only failed to help the weaker countries, it accentuated their problems. They found themselves forced to cope with rising wages and prices. And worst of all, while previously they could leverage the low value of their currency to increase their exports, with the euro this was no longer an option.
“The creation of such a big monetary zone can work only if the strongest take on the task of helping the weakest. This had already happened for Germany: reunification worked thanks to the massive aid transfers from the West to the East. Without that kind of help, poor countries can only end up as losers,” says Straumann.
Feeling of insecurity
And the mistakes just went on in the years that followed. The countries promoting monetary union – Germany and France – not only failed to enforce conformity with the stability criteria laid down by the Maastricht Treaty (see sidebar); in the beginning they broke the rules themselves.
At the same time the weaker countries profited by low interest rates from the European Central Bank to borrow up to the hilt, like Greece, or to feed a fragile housing boom, like Spain.
“Several countries lived above their means for too long and now they are faced with overwhelming debts. The feeling of insecurity is so great that it has triggered a mass flight of capital. This phenomenon, and the resulting lack of liquidity, are the most urgent problems which need to be resolved,” notes Jan-Egbert Sturm, director of the Swiss Economic Institute at the Federal Institute of Technology, Zurich.
New rules for the stability of budgets, financial rigour and sacrifices from the indebted states, Eurobonds, equalisation payments from the stronger countries, aid from the International Monetary Fund: debates and disagreements about solutions to the current crisis will certainly preoccupy European countries throughout 2012.
“What counts now above all is to restore confidence among the people and the financial markets, even if getting out of this tunnel will still take several years.”
End of the euro?
Will European countries be able to find their way to the end of the tunnel? Among the experts, and even among political and economic leaders, uncertainty reigns, and day by day statements are made which seem to suggest the end of the euro zone in its current form.
“Countries in crisis are being forced to economise drastically, which will negatively impact growth and thus their chances of bringing down the debt.
"The stronger countries do not want to give up on the euro project, but they are not doing enough to save it. If the situation remains like that, I would be rather pessimistic,” says Straumann.
Sturm is a bit more of an optimist: “we are facing very difficult years ahead, but I believe that the euro will manage to save itself,” he says. “The political capital invested these last two decades in monetary union is too great for European leaders to abandon it.”
Creation of the euro
On January 1st 1999 the euro became the new official currency of 11 member states of the EU: Germany, France, Italy, Austria, Netherlands, Belgium, Spain, Portugal, Finland, Ireland and Luxembourg.
In its first three years of existence, the euro represented only a virtual currency, used for cashless payments and accounting purposes, alongside the old national currencies.
On January 1st 2002 the new European currency began to circulate physically in the form of banknotes and coins, definitively replacing the national currencies.
The euro zone today includes 17 countries of the EU: Greece adopted the euro in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009 and Estonia in 2011.
Denmark and Britain, obtained a permanent right to “opt out” within the economic and monetary union, which exempts them from belonging to the euro.
Sweden and seven newer EU members in Eastern Europe (Poland, Czech Republic, Hungary, Bulgaria, Romania, Latvia and Lithuania) intend to join the euro at a later date.End of insertion
Economic and monetary union
With the signature of the Maastricht Treaty in 1992, the members of the EU agreed to create an economic and monetary union to reinforce the process of European integration and increase economic growth.
Among its objectives were the coordination of economic policy, the introduction of a single currency and the establishment of a common monetary policy to be managed by the European Central Bank.
The Maastricht Treaty also envisaged stabilisation of national budgets, by limiting government debt to 60% of Gross Domestic Product (GDP) and annual deficits to 3% of GDP.End of insertion
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