So far in 2010, the Eurozone monetary union has faced its single biggest challenge to date. With the euro on the rebound, now is a much better time to think about the future of the currency than in the midst of chaos flush with emotion.
In theory, the euro is supposed to create a unified economy in Europe through which people, goods and money flow with ease across international borders. In some respects, that aspect of Union has been a resounding success—there has not been a war between member nations, and there is a growing amount of economic cooperation within the Eurozone.
It is impossible to contemplate the future of the euro without considering its past. The European Union started as a collection of treaties in the wake of World War II designed to forge a cohesive, codependent economic community of European nations who were formerly military foes. The idea was that in building economic cooperation amongst member nations—originally Belgium, France, Italy, Luxembourg, the Netherlands and West Germany—that economic interdependency could set the foundation for political and military cooperation.
The community of nations expanded to include a larger chunk of Western Europe and the scope of the relationship broadened, reaching its climax with the Maastricht Treaty in 1993, where the European Union was officially born and the goal of a unified currency created. On January 1, 1999 the euro officially came into being as an electronic accounting currency and paper notes went into circulation on January 1, 2002.
Now that we have a very brief outline as to the formation of the European Union and the euro currency, let us consider one of the serious consequences of a currency union. One component of this history that I purposely left out from the brief time-line above was the Treaty of Amsterdam in 1998. The treaty of Amsterdam established the European Central Bank (ECB) to oversee a unified and coordinated monetary policy for the EU member states, based in Frankfurt, Germany, the Eurozone’s premiere commercial center. The consequences of this treaty are only now being learned in a painful and economically frightening way.
In creating a currency union, member nations sacrificed localized control over monetary policy. While economic union has forged a closer relationship between the member nations, there remain vast and considerable difference in the underlying structure of each of the member nations’ local economies. Different challenges face the each country at different points in time, and these various challenges require unique and different remedies. Economies facing troubles in some respects were forced to rely more heavily on fiscal policy with the lack of control over monetary policy.
In July of 2008, as the world was entering a global credit crunch and deflationary spiral, the ECB raised, I repeat: the ECB RAISED, interest rates due to concerns over rising commodity, particularly energy, prices. This could not have happened at a worse time for Greece, as a country heavily reliant on its maritime and shipping sector was suffering severe economic harm from the catastrophic collapse of global trade after the U.S. economy entered its own crisis. This does not completely explain the budgetary troubles in Greece. It was well known that upon joining the currency, Greece suffered from high fiscal debt as a percentage of GDP, and the country has a history of governmental corruption and inefficiency. However, the monetary action taken by the ECB was not only bad for Greece; rather, it was in stark contrast to what Greece actually needed at the time.
Eventually the deflationary spiral that started with the subprime crisis in the U.S. caught up with Europe and the ECB followed the U.S. Federal Reserve Bank in aggressively cutting interest rates. Unfortunately this action was too little, too late for Greece and some other troubled nations.
All this begs the question as to whether a monetary union is truly a beneficial economic structure. Does the sacrifice of control over monetary policy cause more harm than the benefit derived from the ease of trade afforded by the euro? In some respects, the costs of the harm to countries like Greece must be borne by the relatively healthy member nations regardless of whether they bailout the troubled ones. Although there are costs, so too are there benefits.
The successes on both the military and political fronts more than make up for the short-term failures on the economic side. Europe, which had been plagued by decades and centuries of warfare between its various ethnicities and nationalities and is now predominantly peaceful with the free flow of people, goods and capital across all of its members’ borders. Europeans put a significant amount of political and social will behind building the Union to forge closer connections in all aspects of society, not just the economic. The cohesiveness forged by this interrelationship was the primary goal of creating a Union and will go a long way towards ensuring the euro survives even this severe shock.