20th anniversary of the euro: assessing Europe’s single currency

Rise and fall of a new currency

In 1999, after the creation of the Single Market, political leaders agreed on the next big project: a common currency. The euro was born.

It would take another three years until the new currency was available for general usage but in 2002, the first coins and bills were finally issued and distributed across the Union. And the first years were a true success story. The European economy grew stronger and so did the common currency. In July 2008, people could exchange one euro for almost 1.60 US dollars.

But then the crisis struck. What started as turmoil in the financial industry soon turned into a sovereign debt crisis – heavily burdening European states and with them, their currency. Hitting the low point in 2012, the continent and the euro have now recovered, though the times of crisis have left their mark on Europe.

The euro: breaking stereotypes about yet another scapegoat

It is not new that blaming the European Union for domestic problems has become casual speech for some national politicians, and the euro did not escape from this phenomenon – especially in the wake of said crises. In France for example, even if a majority of French citizens support the euro and the benefits it entails, Eurosceptic parties such as Rassemblement National (previously Front National) have tried to present the single currency as the reason for all the hardships of the French economy.

Yet, economic analysis demonstrates that most anti-euro arguments are shaky. Among the most cited arguments is that the euro is responsible for causing unemployment and inflation. But actually, one only needs to have a look at the data from INSEE, the French National Institute of Statistics and Economic Studies, to see that such accusations are inaccurate.

Regarding unemployment, it appears that the euro is not the underlying cause in France, as it was high even before the introduction of the single currency, and actually even decreased before the 2008 economic crisis.

Inflation has been kept, on average, to 1.4% in France between 2001 and 2016 (whereas it was 2.1% between 1986 and 2001). In the euro area, the inflation was limited to 1.6% in 2018. A rise in prices is actually a normal phenomenon in an economy, but it was controlled and limited under the euro. Moreover, the inflation has been 1.9% on average since the introduction of the single currency, but the French minimum salary rose by 3.1%, so the spending power has not decreased. Furthermore, if we analyse the reasons explaining the rise in prices in different sectors, it is hardly attributable to the euro. For example, the rise in prices of gas and energy is linked to a rise in prices of gas and oil on a global level. And then, the increase of the value of the euro took over half of the increase of oil prices. Taxation, an increase in taxes, is responsible for the surge of some products such as tobacco – not the euro. The increase in the price of food products is linked to the increase in prices of agricultural raw materials, which has nothing to do with currency. Finally, the implementation of the euro was indeed the occasion to round up prices upwards (e.g. newspapers, restaurants, some food products…), but the euro in itself is not to blame: shopkeepers and industrialists took advantage of this “windfall” to increase their prices. And coming back to the franc would simply induce a new increase in prices.

Another argument is that abandoning the franc or, let’s say, the schilling, national currencies, for the euro, a single currency shared by 19 member states and managed by the European Central Bank, would represent a loss of monetary sovereignty for France or Austria, respectively. But it is actually the contrary, for various reasons. As outlined for the French case in a previous article published in The New Federalist, the euro has actually provided for regained economic sovereignty as well as economic benefits (for both consumers and businesses). Not to mention all the advantages brought in terms of travelling, price transparency or cost-saving when the same currency is shared by 19 countries.

Last but not least, the single currency does not appear to be the proper scapegoat to blame regarding the 2008 economic and financial crisis. If so, how would one explain that two countries such as Germany and Greece have lived through such radically different economic situations while sharing the same currency? Dubious financial instruments, the housing bubble, bad financial and economic management and control, or difficulties in collecting taxes are certainly to blame in the debt crisis – but not, per se, the currency per.

In conclusion: The euro is here to stay

The euro celebrates its 20th birthday this year. Trust in the currency has recovered and is at a record high and meanwhile, there is a generation of Europeans who grew up only knowing the euro as a means of payment. As President Juncker put it, the currency has become a symbol of European unity, sovereignty and stability.

In spite of all difficulties, 19 Member States – accumulating an incredible total of 340 million people – have meanwhile introduced the common currency. Additionally, non-EU members, Montenegro and Kosovo, use it as an official means of payment. Other European States have fixed exchange rates and thus tied their currencies to the euro. With the exception of Denmark (and the UK), all Member States have agreed to introduce the euro at some point after accession to the Union.

While there certainly are flaws in the institutional setup – a permanent European Monetary Fund as well as a European Deposit Insurance Scheme (EDIS) are still badly needed – the euro has managed to be established as international reserve currency besides the US dollar and the British pound. Plans have been announced to further strengthen the currency’s international role, e.g. by establishing it in the energy market. So while there surely are challenges to be tackled, one thing seems clear: the euro is here to stay.

You can also read the press release co-written by the Presidents of the European Parliament, European Commission, European Council, European Central Bank and Eurogroup on the 20th anniversary of the euro here.