The single currency, which was officially launched on 1 January 1999, has performed its role of shielding against crises and stabilising prices. However, the insufficient convergence of the eurozone’s economies shows the fragility of this incomplete construction. EURACTIV France’s media partner La Tribune reports.
The euro is celebrating its 20th birthday and it is a survivor. Its demise, failure and explosion have been predicted many times, from its creation to the financial crisis and then the sovereign debt crisis.
“Will the Euro make it through 2012?” Isabelle Croizard, La Tribune’s currency exchange expert, wondered seven years ago.
On the occasion of the 10th anniversary of the euro cash changeover, when coins and notes were put into circulation, Croizard noted that the single currency had remarkably played its role as a “reinforced steel shield against the financial crisis,” sparing “the eurozone protagonists the devastating monetary storms to which they had been accustomed before its creation.”
The stability and prosperity brought by the euro were the two advantages highlighted by the European Central Bank (ECB), which, on 1 January 2019, celebrated 20 years of the “cashless euro,” when the exchange rates of the 11 participating states were fixed. While the stability brought by the euro is rarely disputed, the prosperity it created is not always perceived by the people.
A popular currency
The common currency has grown up, is used by 340 million Europeans in 19 countries every day and, despite criticism from sovereigntists, is incredibly popular.
According to the results of a Eurobarometer survey conducted in October 2018 and published in 2018, 74% of respondents across the euro area said they thought the euro was good for Europe, the highest level recorded since 2004. A majority of 64% said they thought the euro was good for their own country, a record high, while in contrast, 25% said that the euro was bad for their country.
In France, this percentage was a little lower, at 59%, declining compared to the previous year. Along with Italy, France is one of the countries where some accuse the euro of bringing about economic difficulties, which are much more often related to a lack of industrial competitiveness.
Support for the euro was the strongest in Ireland (85% thought that the euro was good for their own country), Luxembourg (80%) and Austria (76%).
Maintained price stability
Despite the perception that introducing the euro caused prices to increase, the single currency has succeeded in preventing the return of inflation from burdening household purchasing power.
Since 1 January 1999, annual inflation has amounted to 1.7% on average, which “is below the average inflation rate recorded in the individual countries in the 1970s, 1980s and 1990s, when they had not yet introduced the euro,” the ECB underlined.
“The euro was a logical and necessary consequence of the single market. It made it easier to travel, trade and transact within the euro area and beyond. After 20 years, there is now a generation who knows no other domestic currency,” said Mario Draghi, President of the European Central Bank in a statement published on 31 December.
“During that time, the ECB has delivered on its main task of maintaining price stability. But we also contribute to the well-being of euro area citizens by developing safe, innovative banknotes, promoting secure payment systems, supervising banks to ensure they are resilient and overseeing financial stability in the euro area,” Draghi added.
Need for greater convergence of prosperity
Has the euro supported economic growth or hindered it because of the infamous Maastricht criteria? This is the subject of much debate and yet putting an end to the risk of competitive devaluations is already an undeniable achievement.
The ECB said that “the gross domestic product (GDP) per person living in the EU would likely be as much as much as one-fifth lower today if no integration had taken place since the Second World War” and that the eurozone ranks second among the world’s leading economies in terms of GDP per person.
However, the gaps in GDP per capita have widened between countries, notably between Germany and France or Italy. According to Eurostat, people in Luxembourg have the highest standard of living in purchasing power standard units, with Germany in 6th place, France in 11th and Italy in 12th place. Budgetary orthodoxy rules alone have not converged economies that have quite different industrial situations.
While European Commission President, Jean-Claude Juncker, stated that the euro “has delivered prosperity and protection to our citizens,” the Italian President of the European Parliament, Antonio Tajani, highlighted that efforts were still required.
“In order for Europeans to benefit fully from the jobs, growth and solidarity that the single currency should bring, we must complete our Economic and Monetary union through genuine financial, fiscal and political Union. This will also allow Europe to better shield its citizens from potential future crises,” noted the Italian MEP (member of the European People’s Party and founder of Forza Italia).
An incomplete construction
The single currency’s main weakness undoubtedly lies in its incomplete construction, even though it already represented a revolution by states which agreed to give up their monetary sovereignty. The majority of European leaders agree that the economic and monetary Union needs to be completed.
This will take place not only by completing the banking union and capital markets union but also by establishing genuine budgetary solidarity, in other words, a eurozone budget. This project is strongly advocated by the President of the European Commission, Jean-Claude Juncker, and Emmanuel Macron, who has gained Angela Merkel’s quite lukewarm support.
This project is also supported by the left, notably by French socialist and radical MEPs.
“This currency is incomplete because its parents, who themselves were in a financial crisis, quarrelled too much around its adolescence without so far managing to allow it the autonomy it needed, to provide it with the necessary budget to absorb economic shocks,” the French socialist and radical delegation argued.
“It still is not allowed to consider the eurozone economic area as an integrated area, it still is not allowed to talk at the dinner table at international discussions. This is why, for its birthday, we have to give the euro and citizens a European investment stabilisation function that is up to the task,” the delegation continued.
A report written by French socialist MEP Pervenche Berès supports the establishment of a European investment stabilisation function (financial support in the form of loans to member states in difficulty which are guaranteed by the EU budget) but also including an element of “unemployment compensation in countries subject to an asymmetric shock.”
An insufficiently international currency
In his State of the Union speech in September 2018, Jean-Claude Juncker stated that “we must do more to allow our single currency to play its full role on the international scene.”
Admittedly, the euro is now the second most used currency in the world, with 60 countries having linked their currency to the euro in one way or another. However, its influence on the foreign exchange market has decreased, according to statistics (from 2016) from the Bank for International Settlements.
While the eurozone represents 12% of global GDP, 36% of the international transactions carried out around the world last year were billed or paid for using the single currency.
Only 20% of international reserves in foreign central banks are in euros, which is far behind the dollar (60%), even if no other currency exceeds the 5% mark. After the sovereign debt crisis, central banks have tended to diversify their reserve currencies, particularly in emerging countries.
In order to strengthen the euro’s international role, in early December the European Commission announced that there would be a public consultation and a series of measures.
These measures notably aim to encourage actors in certain strategic sectors, such as the energy sector, to do business in euros, at a time when 85% of the EU’s energy bill is labelled in dollars.
The Commission will also gauge stakeholders’ opinions as to how the euro can be increasingly used in raw material trading (such as agricultural materials, metals and minerals), in the transport sector (shipbuilders and aircraft and train manufacturers) and on the financial markets.