The slow motion train crash of the Eurozone monetary alchemy

In spite of serious troubles the euro survived and it expanded its coverage. Still, the greatest eurozone success is that it has survived by now, although at a huge cost in terms of growth and employment in most participants. However, there is a big difference between surviving and surviving well. Inflation was low and under control, but many would change low inflation for real economic growth. There was a cost of eurozone paid by most participants (bar Germany): austerity, low or no real growth, divergence in living standards, crisis, unemployment and contempt of principles of representative democracy.

At the celebration of the 20th anniversary of the eurozone, Jean-Claude Junker, the President of the European Commission, said:

“For 20 years, the euro has delivered prosperity and protection to our citizens. It has become a symbol of unity, sovereignty and stability, and we must ensure it continues. 'Thus spoke JeanClaude Juncker, president of the European Commission, in `celebration' this week of the 20th anniversary of the adoption in synthetic form of Europe's single currency”.

One may really admire his sense of humour. There were no celebrations by the general public. Anywhere, a currency needs to be organised around the economy in order to serve it, not the other way around as is currently the case with the euro. Automatic intercountry fiscal transfers are essential for the currency union to work. This federal instrument is absent in the eurozone. The eurozone as we know it is almost finished. The new one is not yet emerging. However, the next (imminent) financial crisis will be the test of make it or break it. The triggers may be various and many. One may be the failure of the insolvent Deutsche Bank which is kept together by the scotch tape. Hard choices need to be made. What will come out of it is anybody's guess. Nonetheless, one thing is certain: the outcome will not be glorious.

Many believed that a common currency was unthinkable in Europe some three decades ago. It looked like a pie in the sky. Still, it happened. Many think that fiscal and political unions are impossible now. Political will and commitment (if they exist) may prove them wrong and may avoid turning Maastricht into Arnhem (air distance 127 km). No matter how the eurozone crisis ends, it will not be happy. The final message from this article is that, in spite of gloom and doom, some hesitant optimism about the future of the reformed eurozone is justified, with an emphasis on `hesitant, however, as time passes by, these federalist hopes evaporate.

Economic performance of the eurozone has been a great disappointment for most of the participating countries. The euro has been overvalued for most of its member countries which hampered exports. The objective of the euro was to stimulate growth and provide certain stability, however it became a dysfunctional currency that created troubles chaos and a currency with unhappy and uncertain future. Rather than fostering growth and certain economic convergence among the participating countries, the euro “has fostered divergence among its member countries thus leading to the underperformance of the euro area and undermining its resilience to external shocks” [Bagnai, Granville, Mon- geau Ospina, 2017, p. 524].

There exists a consensus about the dysfunctional structure of the eurozone. Having this diagnosis is important, but there is a discord on the way to resolve the problem: the Germans and a few thrifty others argue in favour of strict application of the existing rules, while many others such as French or Italians are in favour of relaxing those statutes.

The eurozone was supposed to serve the Europeans and to provide them with a brighter economic future. Now, the Europeans are asked to serve and save the eurozone, e. to accept lower wages, higher taxes and reduction in social benefits (yellow vest protestors). Is this the promising way forward for the eurozone?

Fiat currencies are not forever. The longest surviving ones and shining exceptions are the US dollar, the pound sterling and the Swiss franc. The possible dissolution of the eurozone would not be the end of the world. It would just return the EU where it was in 1992, hence one needs to prepare for the post-eurozone EU. If federal-type reforms are not belatedly implemented, it may be better to leave the eurozone and save whatever could be saved in the EU.

Grateful to Eric Fiechter, Zeynep Kaplan, Jovan Njegic, Marko Malovic, Patrick Minford, Sergei Sutyrin and two anonymous referees for their comments, assistance and suggestions. The views expressed are my own and do not necessarily reflect the position of the institutions for which I work. I am solely responsible for all errors and mistakes.

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