Failed euro experiment dealing a fatal blow to hopes of economic integration
Only a stable, functioning banking union with centralised oversight can save the eurozone, writes Colm McCarthy
Eleven European countries abolished their national currencies in 1999 and adopted the euro. Abolishing the national currency is a big decision, much bigger than fixing your exchange rate against other currencies. If that goes wrong, you can always change it. If you no longer have a currency and get into trouble, it is virtually impossible, as a practical matter, to introduce a fresh one from scratch. Scrapping national currencies has turned out to be an irreversible decision. Two-thirds of the EU's population of just over 500 million live in eurozone countries. If the euro turns out to have been a macro policy mistake, it will go down as one of the biggest ever made.
The number of people who live in the 18 eurozone members is roughly the same as the number of dollar-using citizens of the USA. The US citizens have got the better deal. They live in a well-designed and fully-functioning monetary union whose boundaries coincide with those of a long-established single federal state. Their eurozone counterparts live in a common currency area whose boundaries do not even coincide with those of the European Union, which is in any event not a single state. A US-style monetary union is a more stable construct than a common currency area. The big difference is that a monetary union is protected by design from the risk of break-up, particularly through a unified system of bank supervision and resolution. A common currency area, designed and managed with sufficient carelessness, is just a bunch of countries using the same currency but without common banking and financial policies and permanently vulnerable to financial disintegration. Both Greece and Cyprus almost fell overboard.
It is sometimes argued that you cannot really have a durable monetary union without political union, in which case the 1999 decision was, to say the least, a little premature. But most economists agree that a common currency area can be converted into a durable monetary union without going as far as full political integration. This is just as well, since European political union is hardly about to happen. But numerous eurozone countries are now stuck in the dysfunctional common currency with no viable escape hatch. Had they understood the risks, they might have chosen to stay out, but there is no practical exit option.