When eurozone finance ministers recently delivered speeches to praise the single currency, on the occasion of the 20th anniversary of the launch of euro banknotes and coins, something remarkable happened: Nothing. No one joined the celebrations, and no one cared enough about opponents.

ATHENS – This month, two decades ago, the single European currency became a tangible reality with the introduction of euro notes and coins. To celebrate the occasion, eurozone finance ministers made a joint statement describing this currency as “one of the concrete achievements of European integration”. In fact, the euro has done nothing to promote such integration. Rather the opposite.

The main purpose of the euro would be to facilitate integration by removing the cost of currency conversions and, more importantly, the risk of destabilizing devaluations. Europeans have been promised that it will encourage cross-border trade. Living standards would converge. The business cycle would shorten, leading to greater price stability. And investment within the eurozone will generate higher overall growth and convergent growth among member states. In short, the euro would support the benign Germanization of Europe.

Twenty years later, none of these promises have been kept. Since the creation of the eurozone, growth within it has been 10%, much less than the 30% increase in world trade and, more significantly, than the 63% increase in trade between Germany and three non-adopting European Union countries. not. the euro: Poland, Hungary and the Czech Republic.

The same thing happened with productive investments. A huge wave of loans from Germany and France spilled over to countries such as Greece, Ireland, Portugal and Spain, causing the successive bankruptcies that were at the heart of the euro crisis a decade ago. But most of the foreign direct investment went from countries like Germany to the part of the EU that chose not to adopt the euro. Thus, while investment and productivity within the eurozone differed, convergence was achieved with the countries that remained outside.

In terms of income, the average German earned in 1995 for every 100 euros ($ 114), the average Czech 17 euros, the average Greek 42 euros and the average Portuguese 37 euros. Of the three, only the Czech could not withdraw euros from an ATM after 2001. And yet, in 2020, its income converged to the average German income of 100 euros for an impressive 24 euros, compared to just 3 euros and 9 euros of their Greek and Portuguese counterparts, respectively.

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The key questions are not why the euro did not bring convergence, but rather why it was supposed to. If we look at three pairs of well-integrated countries, we can draw useful conclusions: Sweden and Norway, Australia and New Zealand, and the United States and Canada. Their close integration has grown – and has never been questioned – because they have avoided monetary union.

To appreciate the role that monetary independence has played in keeping their economies in line now, let’s look at their inflation rates. Since 1979 it has been similar (broadly speaking) in Sweden and Norway, in Australia and New Zealand, and in the United States and Canada. And yet, over the same period, their bilateral exchange rates fluctuated widely, acting as a buffer during skewed recessions and banking crises and helping to keep their integrated economies in line.

Something similar happened in the EU between Germany, the main economy in the eurozone, and Poland without a euro: when the community currency was created, the Polish zloty depreciated by 27%. Then, after 2004, it appreciated by 50% before falling again by 30%, during the financial crisis of 2008. Consequently, Poland both avoided the debt-driven growth that characterized member states such as Greece, Spain, Ireland and Cyprus, such as the massive recession in the midst of the euro crisis. Is it any wonder that no EU economy has converged more noticeably than that of these two countries?

Looking back, it was as if the euro was designed to cause maximum divergence. In fact, the Europeans created a common central bank that did not have a common state to support it, while at the same time allowing our states to do without a central bank to support them in times of financial crisis , when states have to rescue banks that operate. on its territory.

In the good old days, cross-border loans created unsustainable debt. And then, at the first sign of financial disruption (whether it is a public or private debt crisis), the dice were thrown: a spasm throughout the eurozone whose inevitable consequence was a sharp divergence and major new imbalances.

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In layman’s terms, the Europeans looked like an unhappy car owner who, in his attempt to avoid rolling into the corners, removed the shock absorbers and drove straight into a deep pit. The reason why countries like Poland, New Zealand and Canada have endured global crises without falling behind (or, worse, relinquishing sovereignty to their stronger duo counterparts, Germany, Australia and the United States) , is precisely because they opposed a monetary union with them. . If they had succumbed to the temptation, the crises of 1991, 2001, 2008 or 2020 would have turned them into debtor colonies.

Some argue that Europe has learned its lesson. After all, in response to the euro crisis and the pandemic, the eurozone has been strengthened with new institutions such as the European Stability Mechanism (a common regional rescue fund), a common supervisory system for European banks, and the Next Generation EU recovery fund.

These are undoubtedly big changes, but they are the minimum needed to keep the euro going without changing its character. By putting this into practice, the European Union has confirmed that it is prepared to change everything as long as everything remains the same or, more precisely, to specifically prevent the creation of a sufficient fiscal and political union, which is the requirement to manage macroeconomic shocks and eliminate regional imbalances.

Twenty years after its creation, the euro is still a construction that promotes divergence instead of producing convergence. Until recently, this heated debate inspired, which gave rise to the hope that Europe was aware of the centrifugal forces threatening its foundations.

It is not so. When eurozone finance ministers declared their joint support for the single currency, something remarkable happened: Nothing. No one joined the celebrations. Nobody even bothered to voice their opponents. An apathy that does not bode well for a union’s prey for growing inequality and xenophobic populism.

The author

Yanis Varoufakis, former finance minister of Greece, is the leader of the MeRA25 party and a professor of economics at the University of Athens.

Translated from English by David Meléndez Tormen

Copyright: Project Syndicate, 2020



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