Like many people of 20, the European currency has experienced a traumatic adolescence. At some moments, many thought it would not reach this age of maturity at all. But it has. That is a success. Yet the experience has been so difficult that it necessarily raises big questions. In this birthday assessment, I will consider four.
First, was the euro a sensible idea? In a lucid speech last month, Mario Draghi, president of the European Central Bank — in my view, one of the two people (the other being German chancellor Angela Merkel) most responsible for the euro’s survival — explained the rationale for its creation. It would have been impossible, he argued, to maintain the deep integration of the single market without the single currency. Thus, “support for the single market would be undermined in the long run if firms that did invest in raising productivity could be deprived of some of the benefits by ‘beggar-thy-neighbour’ behaviour through competitive devaluations in other countries. Open markets would not have lasted.”
Yet it was also clear that the euro was very risky. A common monetary policy might drive cumulative divergence, with lower real interest rates in the high inflation countries (and so booms) and vice versa. By yoking together countries with such different economic institutions and behaviours, especially in the absence of a shared political process, the euro might pull the peoples of Europe apart, not together. Thus, in 1991, I argued that: “The effort to bind states together may lead, instead, to a huge increase in frictions among them. If so, the event would meet the classical definition of tragedy: hubris (arrogance), ate (folly); nemesis (destruction).”