The Euro’s Next 20 Years

The currency has defied its critics, but lack of supply-side reforms threatens its future.

By The Editorial Board
The Euro’s Next 20 Years
Photo: miguel medina/Agence France-Presse/Getty Images

The euro celebrates its 20th birthday on Jan. 1, and more than most such milestones this one is a major accomplishment. The creation of the monetary union stands as one of the most consequential events in postwar Europe, along with the creation of the Common Market, the collapse of the Soviet bloc and the reunification of Germany.

The euro’s durability is all the more remarkable given the demands it places on its members in return for a promise that remains only partly fulfilled—a fact that has bedeviled the currency’s first two decades and could still tear it apart.


This promise is easy to forget given the traumas that have afflicted the bloc. At its best the euro has always been about free trade. When we heralded the agreements creating the currency in 1998, we noted first and foremost that a successful monetary union “would promote free and efficient commerce everywhere”—and not only within Europe. Robert Mundell, the Nobel-winning economist widely recognized as the father of the euro, wrote in these pages that, “The benefits will derive from transparency of pricing, stability of expectations and lower transaction costs.”

Those goals have largely been met, as has Mr. Mundell’s coda that another euro benefit would be continent-wide monetary policy “run by the best minds that Europe can muster.” For all the debate over Mario Draghi’s post-panic interventions in particular, the European Central Bank has delivered more responsible monetary policy than many Europeans could count on from their pre-euro central banks.

The euro also has checked some of the economics profession’s worst ideas. Mr. Mundell and a handful of others argued from the start that the euro would preclude the devaluations by which Keynesian economists seek to paper over their failures at the expense of savers and the poor. Economists and columnists who should know better still claim the euro’s fatal flaw is that struggling economies can’t devalue their way back to prosperity.

Voters in Europe’s shakiest economies understand that this is a benefit not a cost. Greeks have good reasons to chafe at Brussels-directed economic mismanagement. But in the depth of their crisis in 2015 they were eager to send their euros abroad to protect their savings from a threatened reintroduction of the drachma.

No one has built a political consensus to leave, even amid the rise of populist and nationalist forces. Some 85% of Irish, 64% of Portuguese, 62% of Spanish and 60% of Greeks said in the November issue of the European Commission’s Eurobarometer poll that the euro is good for their countries.

This is astonishing support in countries that have suffered so much to keep the currency, and it is mirrored by strong support in countries whose beleaguered taxpayers undergird the union. Seventy percent of Germans think the euro is good for Germany, and 69% of Dutch say the same for the Netherlands. Support for the currency is particularly strong among young Europeans.

Yet the politics of the euro remain complex. Many of the euro’s founders hoped that sharing a common currency would encourage Europeans to think of themselves as sharing a common European polity. Economic integration would demand an ever closer political union, and both would enhance Europe’s global power and prestige. Other euro supporters hoped the common currency would spur supply-side reforms that were overdue 20 years ago.

Neither camp has been entirely right. We and others hoped that with competitive devaluation no longer an option, governments would have to deregulate, cut taxes and reduce spending to let domestic productivity converge with the euro’s strongest members. Early on it seemed to work, especially when Germany implemented labor-market reforms in 2003-04 and shed its reputation as the sick man of Europe.

But this optimism underestimated how reform-averse Europe can be. Countries honored national deficit targets in the breach, while less competitive economies like Greece took advantage of low euro-borrowing rates to live beyond their means. Since the eurozone crisis that kicked off in Athens in late 2009, neither Brussels nor most national capitals have pursued the policy reforms they need to restore pre-crisis prosperity.

The result is a eurozone whose economy grows too slowly during global booms and seems less resilient to every new global slowdown. Extraordinary monetary experimentation from the ECB over the past decade bought more time for its lagging members. Yet Mr. Draghi’s repeated calls for supply-side reforms to put the eurozone on a more stable footing have gone largely unheeded except, belatedly, in Emmanuel Macron’s France. And Mr. Macron’s reforms are now in jeopardy after the uprising against his fuel tax.

This uneven distribution of the costs of reform exacerbates political tensions between members. Germans who accepted less welfare and modest wage increases as the cost of longer-term competitiveness chafe as Greeks try to use German subsidies to avoid those costs themselves. Italians who see Mr. Macron get a pass for violating eurozone fiscal rules with pro-growth tax cuts refuse to accept they don’t warrant similar forbearance for a new welfare binge.


The temptation is to view this as an institutional problem to be solved perhaps by creating a eurozone finance minister or doubling down on hasty political integration. Mr. Macron has made this the centerpiece of his European agenda and even a growing number of German economists seem to think some form of fiscal union will have to happen. Many politicians also want new bailout funds or fiscal transfer mechanisms.

But Europe is still composed of nation states with individual traditions and politics, and there is no consensus for such political integration. In any case the main promise of the euro was always economic—to promote free commerce and impose policy discipline. The lesson of the euro’s first 20 years is that only economic reform to boost growth and productivity in lagging members can allow the euro to live up to its full potential.

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