Happy birthday, euro: two decades ago (Jan. 1, 1999, to be precise), a first wave of European countries adopted the currency and handed over monetary-policy decision making to the European Central Bank. Three years after that, euro notes and coins were introduced in the biggest changeover in history.
Now, 19 countries have adopted the common currency, a success in several important respects. It is used by more than 340 million Europeans, and, as intended, has fostered deeper integration between EU-member countries, making it easier for companies to do business across the bloc and for citizens to move about. In terms of exchange rates, after 20 years and a couple of financial crises, it’s just about flat against reserve currencies like the US dollar and the Japanese yen.
And yet, as the currency leaves its teenage years, the euro is probably better known for its shortcomings. The EU sovereign debt crisis highlighted members’ inability to massage exchange rates when economic growth slows (potentially boosting exports) and adjust interest rates (to rev-up business activity) during a slump. This becomes a problem when countries are moving along at different speeds. A single monetary policy can’t cool an overheating economy and support a struggling one at the same time. The lack of flexibility was underscored when Greece, slogging through years of crisis, nearly crashed out of the common currency in 2015.
In politics, people sometimes say you need a crisis to get the big things accomplished. By that measure, the turmoil that roiled currency bloc in recent years wasn’t a total waste. The EU now has a rescue fund known as the European Stability Mechanism, to try to keep financial panics from spiraling out of control. EU-level oversight of bank finances has been implemented, and the European Commission reviews national budgets. The ECB has also demonstrated that it will take decisive steps when needed—famously doing “whatever it takes”—to protect the bloc from soaring interest rates.
The trouble is that, not so deep down, those old problems of inflexibility are still there. An even deeper union is needed. That could require rich countries like Germany and the Netherlands to provide “fiscal transfers“—providing tax revenue to help support member countries in economic distress. A proper central budget could help accomplish this, but French president Emmanuel Macron’s efforts to implement such a thing have been resisted. An EU deposit-insurance system to prevent bank runs is still out of reach as well.
Will the euro’s 20-something years be as turbulent as its teens? Probably—and perhaps that’s a good thing.
ECB president Mario Draghi, after all, famously compared the currency to a bumblebee, which somehow flies even though it’s not supposed to be able to. Given the system’s inherent instability, the existential crisis that forces a choice between failure and the further integration needed to finally fix the currency union could be just around the corner.