Euro at 20 – OrissaPOST

Jean Pisani-Ferry


TA few years ago, on January 1, 2002, citizens of 12 European countries started using new euro banknotes and coins. A larger-than-life project – emblematic of a time when European leaders were bold enough to step into the unknown – has thus become a tangible reality.

This flawless transition crowns a company imagined in the 1970s, conceived in the 1980s and negotiated in the 1990s. Expectations were high: supporters of the euro hoped that it would bring economic and financial integration, a convergence of policies, political fusion and global influence.
Two decades later, it’s hard to avoid being disappointed with economic integration. The first assessments of the trade impact of the single currency revealed that it barely exceeded 2%. Recent research from the European Central Bank puts the effect at perhaps 5%. It’s still small, and in itself not worth the effort. Two regions of Europe trade with each other on average six times less if they are not in the same country. Due to history, languages, networks, justice systems, and reluctance to unify regulations, national borders still matter considerably.

The history of financial services is more dramatic. In the early years, banks extended credit abroad, often recklessly, until the euro crisis ten years ago triggered a precipitous pullback behind national borders. Regulators, applying the famous aphorism that banks are global in life, but national in death, have told them to stop sharing liquidity with non-national subsidiaries. Fragmentation ensued.

The bold decision to launch a European banking union in June 2012 responded to this. But the implementation was only partial: while the banks of the euro zone are now supervised by the ECB, insolvency cases are found de facto in the hands of nationals. Financial integration has picked up somewhat, but momentum is weak.

Although pan-European banks are able to diversify risks on a larger scale, national governments remain reluctant to give up privileged relationships with “their” banking systems.

The convergence of policies towards the top performers was supposed to result from self-discipline, as well as fiscal policy rules and the creation of coordination processes. But, having given up the autonomy of monetary policy, many governments have rejected other demands of Brussels. For ten years, credit growth and inflation rates diverged, and few of them except then-ECB President Jean-Claude Trichet were very concerned. When the euro crisis finally erupted, it brought the northern and southern member countries of the EU into complete contradiction.

Convergence has since improved. Under constraint, the competitiveness gaps narrowed. The ECB helped quell speculation on leaving the euro zone, ensuring that borrowers in all member states have access to similarly priced credit. The response to the COVID-19 shock has been remarkably cooperative, with the support of the European Commission and the ECB. And the recovery program launched in the summer of 2020 broke long-standing taboos.
There is now a debate about how much further reform Europe’s macroeconomic policy system needs. Some argue that the current arrangements would work well if governments played by the rules. But as myself and a group of economists and lawyers argued recently, today’s changed environment means that political priorities cannot focus solely on promoting discipline in each. Member state.

Instead, high debt ratios, low interest rates, the likelihood of recurring turmoil, and age-old challenges like climate change call for the coordination of monetary and fiscal policies, reform of fiscal rules, and making arrangements to jointly cope with shocks. It is encouraging that Italian Prime Minister Mario Draghi and French President Emmanuel Macron endorsed such reforms in a recent commentary.

Political agglomeration, a long-standing European objective, was to follow monetary union. Hans Tietmeyer, the late German central banker, liked to quote Nicolas Oresme, a medieval philosopher who said that money belongs to the community rather than to the prince. Supporters of the euro hoped, somewhat confusedly, that a common currency would create a sense of community.

It did not happen directly. During the 1991-92 negotiations on the Maastricht Treaty, governments were supposed to discuss political union alongside monetary union. But many countries, starting with France, have rejected federal plans. Citizens initially treated euro banknotes as a technicality and not as a sign of belonging. Moreover, the new Member States, mainly from Central and Eastern Europe, which joined the EU in the mid-2000s did not share the post-national ethics of the Union’s founding fathers. The euro crisis has confirmed that solidarity remains rare.

But the euro can still indirectly generate a sense of community. Although fear, not love, has so far prevented countries from leaving it, in some ways the result is the same. Far-right populist politicians such as Marine Le Pen in France and Matteo Salvini in Italy have toned down their criticism of the euro. No major politician wants to bet against this anymore.

The writer, principal researcher at the Brussels-based think tank Bruegel and non-resident principal researcher at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa Chair at the European University Institute. © Project union.

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