20 Years of the Euro: A Maturity Test Passed

European Central Bank

Despite some problems, the common currency has contributed a lot to the stability of the EU.

Most people can certainly remember January 1, 2002, when they first pulled new euro bills out of the ATMs instead of their D-Marks, Francs, Liras, Pesetas, Gulden on New Year's Eve. I have a special memory of the introduction of euro cash 20 years ago. On New Year's Day 2002, I interviewed Romano Prodi, then President of the European Commission, in Vienna. He praised the design of the banknotes by the Austrian Robert Kalina. When I objected that there were no personalities, only abstract architectural elements, he said that Goethe, Dante or Molière could have been depicted, "but then the argument would have started about who would be on the highest banknotes." Prodi also stressed that the euro would strengthen the European economy and do much to develop a European identity. 

And that prediction has come true. Hardly any other element is associated with the European Union as much as the common currency. For younger people in particular, the euro, which is now official currency in 19 EU countries that together form the euro zone, as well as in six other European states, has become a natural part of their everyday lives, especially when traveling. In the EU's single market, the euro facilitated and promoted cross-border trade. And the euro also proved its worth internationally, quickly becoming the world's most important reserve currency after the U.S. dollar.

The birth pangs of the single currency, however, were severe. The German government, in particular, knew that a majority of Germans wanted to hold on to the Deutschmark. But the euro was also the price paid for France's agreement to German reunification. And Helmut Kohl, the German chancellor at the time, saw the common currency as an opportunity for the EU states to grow further together.

At Germany's insistence, a cap on new annual debt (3 percent) and on total debt (60 percent of GDP) had previously been introduced and enshrined in the "Stability and Growth Pact." But when even countries like Germany and France violated these requirements, sanctions were not imposed - as was intended. This also encouraged smaller countries to take on debt.

To this day, the euro is also accused of having triggered price increases. In fact, inflation rates were higher before the Euro replaced the national currencies. But in some areas, such as the restaurant trade, the euro led to noticeable price jumps soon after its introduction. 

U.S. experts in particular had not given the euro a long future without a common fiscal policy with harmonized tax rates. In fact, imbalances in the current account deficits, triggered by inflation caused by excessive borrowing, soon led to major problems in the euro zone. The GIISP countries (Greece, Italy, Ireland, Spain and Portugal) were the most affected. Especially in Greece, which had been admitted to the euro zone with embellished statistics, the threat of national bankruptcy in 2010, which would have possibly meant the end of the euro, could only be prevented with extensive financial aid and drastic austerity plans. In 2012, the former president of the European Central Bank, Mario Draghi, had been able to fend off attacks on the euro by financial speculators by promising to buy up bonds of EU states without limit if necessary. With the words to do „whatever it takes“ the Italian, now prime minister of his country, saved the euro. 

But since then, opponents of the euro, who have always warned against a "debt union" in which countries with balanced budgets would have to come to the aid of deficit sinners, have felt their fears confirmed. Recently, there has been growing criticism of the European Central Bank for holding on to low interest rates despite higher inflation rates, thereby devaluing savings deposits in particular.

With billions in aid to boost the pandemic-damaged economy, the EU has moved even further away from the stability criteria. But the new German government has announced that it will not forget about countries hit harder by the pandemic when it comes to covid aid. Even German Finance Minister Christian Lindner, who had previously always ruled out a debt union, is now showing a willingness to compromise, because Germany also has a responsibility for the political stability of the entire EU and the cohesion of the euro zone.

Currently, the European Central Bank is studying the possibility of a "digital euro" to complement cash. 

So the balance sheet for the single currency is positive overall. Other EU countries such as Poland and Croatia are considering joining the single currency. On its 20th birthday, the assessment is therefore: the euro has survived all crises so far and thus also contributed significantly to the stability of the EU.