The Euro after 20 Years is a historic success
Contrary to many negative predictions, the euro, as a currency, is a remarkable success in terms of credibility and stability. The euro, as a currency, and the euro area, as a single market with a single currency, proved a remarkable resilience in the worst global financial crisis since World War II. The euro area was quick, imaginative and flexible to learn lessons from the global financial crisis. The euro and the euro area were and are benefiting from a large popular support, which explains largely their resilience in the crisis. The euro area is a success in terms of real growth measured during the period starting from its inception until today.
KeywordsEuro Euro area Historic success Credibility Resilience Popular support
JEL ClassificationE42 E58 F55
When reading academic works, published observations, articles signed by specialized journalists as well as articles for a large public, coming particularly from non-European countries, there is often the remark that the euro had been a disappointment. The single currency economic performance is supposed to be very poor, particularly in comparison with the USA. The impact of Economic Monetary Union (EMU) on public opinion in member countries is deemed negative, dividing countries and eroding confidence in the European project.
I think that this is a wrong view, which does not represent reality, is deeply misleading and can drive foreign governments, leaders, economic agents and market participants to make wrong decisions. The fact that there is a significant international view which is not correct does not really surprise me: the existence of a significant negative bias against the single currency has been observed since the effective inception of the euro.
Claiming that the euro is a historic success, I must mention to be fully transparent that I had the honor and privilege to participate actively in the preparation, inception and management of the single currency. I was advisor to the French President, Valéry Giscard d’Estaing, when he launched, together with the German Chancellor Helmut Schmidt, the European Monetary System and its Exchange Rate Mechanism (1979). I was Assistant Secretary, head of the Cabinet office of Edouard Balladur, Minister of Finance, and then Undersecretary of the French Treasury (1983–1993), period when France decided to pursue a bipartisan economic policy of “competitive disinflation” designed, in particular, to reinforce economic and monetary integration. As Undersecretary of the Treasury, I negotiated the Maastricht Treaty with my European colleagues. As Governor of the independent Banque de France, succeeding Jacques de Larosière in 1993, I had the responsibility to drive the French franc towards the single currency from 1993 to 1998. From 1998 to 2003, I was a member of the Council of Governors of the European Central Bank. From November 1st 2003 up to end of October 2011, I was President of the ECB and signed during 8 years all the euro banknotes.
So, from 1979 to 2011, I worked during 33 years on the single currency concept and implementation. I accept that one could say that I am necessarily biased in favor of the euro. At the same time, the fact that I could spend a third of a century on the single currency demonstrates in my eyes that we are not speaking of a short-term experiment promised to quick failure but of a longer term endeavor which has an historic dimension. By the way, a better computation of the period over which single currency was envisaged and implemented would start with the Werner Report (1970) which proposed for the first time, the concept of EMU (Economic and Monetary Union) and reaches today (namely 2018). This represents a period of 48 years—around half a century.
Contrary to many negative predictions, the euro, as a currency, is a remarkable success in terms of credibility and stability.
The euro, as a currency, and the euro area, as a single market with a single currency, proved a remarkable resilience in the worst global financial crisis since World War II. The euro area was quick, imaginative and flexible to learn lessons from the global financial crisis.
The euro and the euro area were and are benefiting from a large popular support, which explains largely their resilience in the crisis.
The euro area is a success in terms of real growth measured during the period starting from its inception until today.
The judgement is more nuanced as regards nominal and real convergence inside the single currency area, which calls for reinforcing, economic, fiscal and financial governance.
A success in terms of currency credibility and stability
In January 1999, the euro started from scratch. The exchange rate was 1.17 US dollar for one euro. There was no doubt for most of the observers and economists outside continental Europe that the euro would not stand at par with the dollar in terms of credibility, medium and long-term capacity to keep its domestic and international value. The idea that a currency born in particular from the merger of the Dutch guilder, the DM, the escudo, the peseta and the lira would overtime inspire a high level of confidence, appeared then to be very presumptuous.
At the time I am writing this article, the euro-dollar exchange rate is approximately at its entry level (1.15 US dollar). The overwhelming majority of economists and market participants have no more any doubt on the capacity of the euro to keep its international value. During a part of the first 20 years of the new currency, remarks were made on the fact that the euro was much too solid and too strong, which was highly paradoxical for a currency deemed to lack credibility at its inception!
The international credibility and success of the new currency are confirmed by facts and figures: the euro is by far the second international currency after the dollar. According to the ECB,1 it represents 22% of the “international debt outstanding” (63% for the dollar, 2.6% for the yen).
In terms of “global payment currency”, it represents 31.3%, approximately ten times the percentage for the yen and not far from the dollar (42.1%).
It amounts to around 20% of foreign exchange reserves, approximately one third of the dollar foreign exchange reserves and five times the yen reserves.
The euro is the unchallengeable second most important currency. I would only add that the International Monetary System is called to change structurally with the growing presence and use of the renminbi which is likely to contribute to significant changes both for the dollar and for the euro.
The international credibility of the euro is echoed by its domestic, pan-European stability. The ECB made clear from its inception that it had a definition of price stability that would be the yardstick to judge its capacity to deliver stable prices: less than 2%, quickly clarified in 2003 as “less than 2% but close to 2% in the medium run”.
Since its creation, the average euro inflation is around 1.75%. It is an impressive result over around 20 years, in line with the definition of price stability, less than 2% but close to 2% in the medium run.
The euro and the euro area proved impressive resilience in the worst global financial crisis since World War II
In very turbulent times, the euro, as a currency, and the euro area proved remarkable resilience.
At the inception of the euro, a significant global analysis, outside continental Europe, was not only that the single currency would not inspire confidence, but also that it would be short-lived, as a kind of audacious experience deserving some respect for its boldness but incapable to sustain the difficulties of hard times. In this view, the capacity of the currency to hold in the worst economic and financial circumstances would appear as a miracle. This explains why so many eminent economists predicted the end of the European endeavor after the start of the financial crisis and, particularly, after the start of the sovereign risk crisis, the epicenter of which was in the euro area.
First, refusal to fully apply the rules of the Stability and Growth Pact (SGP) before the crisis;
Second, absence of close monitoring of the evolution of the cost competitiveness of member countries and of associated domestic and external imbalances. This was one of the major lacunae in governance of the EMU from the start;
Third, absence of banking union;
Fourth, absence of a specific instrument to fight against speculation (no European Stability Mechanism at the beginning of the crisis);
Fifth, poor implementation of needed structural reforms all over the euro area;
Sixth, absence of full achievement of the single market, particularly in the service sector.
The underlying concept of the euro area was EMU, namely Economic and Monetary Union. The “Monetary Union” was undoubtedly there: one single currency, one exchange rate vis-à-vis other currencies, one single credibility, one inflation at the level of the single currency area. The “Economic Union” had lacunae in its design and was poorly implemented before the crisis. All taken together, the economic, fiscal and financial governance of the whole euro area was suboptimal.
That being said, most external observers missed three points when the sovereign risk crisis erupted in 2010 and 2011.
The first mistake was to consider that all member countries were in a crisis situation. As a matter of fact, out of the15 countries members of the euro area at the time of the Lehman Brother bankruptcy, 5 of the countries (namely one third) had very grave economic, fiscal and financial problems. The paradox of the euro area was that the area included both the worst public signatures in the eyes of the market participants (for instance Greece, Portugal, etc.) and the best ones (Germany, Netherlands, Austria, etc.) among the advanced economies. The euro, as a currency, was reflecting the average situation of the euro area and not only the part of it which was in crisis, which represented a minority. Seen from this standpoint, the remarkable resilience of the euro, as a currency, was not a miracle.
The second mistake was to underestimate the capacity of the euro area to be flexible, to correct its weaknesses in terms of economic governance and to demonstrate both solidarity at the level of the area and strong national capacities to adjust in the crisis countries. In the crisis, the Stability and Growth Pact (SGP) was reinforced, the Fiscal Stability Treaty was signed and ratified, the Macroeconomic Imbalance Procedure (MIP) was set up, Banking Union was created and the European Stability Mechanism Treaty signed and ratified. All four first weaknesses mentioned earlier were addressed. Ireland, Portugal and Spain, in particular, demonstrated a real capacity to adjust.
The third mistake was to neglect the attachment of people in the euro area to the single currency. It is this popular support that explains the capacity of the euro area to adapt and to prove a remarkable resilience.
The popular support was and is impressive
The conventional wisdom was and still is that popular support was dramatically lacking for the European integration project. This belief was reinforced by the unexpected success of a political populist persuasion in the UK and in the US. It appeared quite natural that a political wave characterized by nationalism, protectionism and xenophobia would be present in continental Europe and would have also a strong anti-European Union component, as was the case in the UK for instance.
It is unchallengeable that the frustration of public opinion, generalized in the advanced economies, is also present in the European Union and in the euro area. But the paradox is that this dissatisfaction is directed significantly more towards national governments, parliaments and national institutions, than towards the European institutions (Commission, Council and European Parliament).
The last survey “Eurobarometer”2 is particularly interesting. Overall 42% of Europeans “tend to trust the European Union”, significantly more than those who “tend to trust their national government and their national parliament” (34%). This tendency is even more impressive when comparing the proportion of citizens that “tend not to trust” (48% for the European Union, much less than the 61% for national governments and 60% for national parliaments!).
The support of the euro, inside the euro area, is high and much higher than the perception of global observers. 74% of citizens of member countries approve the sentence: “A European economic and monetary union with one single currency, the euro”, while 20% are against the sentence. The fact that this approval is significant is confirmed by the response of the citizens of the UK (27% approve, 62% disapprove). The present proportion of 74% is the highest one in the survey.
One of the most frequent errors made by observers outside the euro area was that the euro was rejected by public opinion. I was often confronted to the view that the Greeks were massively in favor of leaving the euro to avoid “austerity” and that the Germans would massively take advantage of the crisis to get back to their previous national currency, the DM. Nothing was more wrong! The Greeks were massively in favor of preserving their euro-participation (69 are approving the previous sentence on the euro). And the Germans were (and are) strongly in favor of the euro (today, 80% are approving that sentence).
The euro and the euro area is much more of an economic success than is generally recognized
Even if the average global observer can be reasonably convinced that, all taken into account, the single currency was a success in terms of stability and credibility, that the euro area demonstrated extraordinary resilience in exceptional circumstances and that a surprising but unchallengeable popular support is accompanying this historic European endeavor, there is a negative dimension which will immediately be presented as the ultima ratio: the euro and the euro area are an indisputable real economy failure!
Comparing the euro area to the United States, the economy weakness of the single currency area appears at first look unchallengeable. But it is because of two optical illusions.
First, the nature of the comparison of the real growth figures: usually done in absolute terms, not taking demographics into account. Then the comparison is always to the advantage of the US which benefits from a yearly positive demographic growth differential of around + 0.8%. Second, in the most recent period, real growth in the euro area was hampered not only by contagion of the global financial crisis of 2007–2008 but also by the sovereign risk crisis of 2010–2013, the euro area being at its epicenter. The recovery started in the US mid-2009 while the recovery in the euro area started several years afterwards (in 2013).
The correct judgment should, in my view, start with the setting up of the euro—January 1999—up to now, namely the same period of almost 20 years already mentioned. It seems the most pertinent period of time for three reasons: first, it corresponds precisely to the period of the euro; if the euro is responsible for economic failure, it should be visible. Second, it is a period sufficiently long to cover more than an economic cycle. Third, it is sufficiently far from the start of the global financial crisis not to be too influenced by the various episodes of the crisis on the real economy of the US and of the euro area.
That being said, where do we stand?
To be sure that my comparison between the US and the euro area would be as sure and correct as possible, I will stick to IMF figures. According to the IMF,3 the 1999 GDP per capita of the euro area was 22.310 dollars compared to 34,600 dollars in the US. According to current projections, the respective GDP per capita in 2018 would be 42,070 dollars and 62,150 dollars. The dollars are current dollars over the period.
These IMF figures suggest multiplication of the GDP per capita by 1.89 in the euro area and 1.80 in the United States. The difference, to the advantage of the euro area, is modest and does not suggest a significant advantage. But it does not confirm the dramatic failure that is often part of the conventional wisdom.
Whenever is the starting year for the computation—1998, 1999 or 2000—the bottom line is that there are no figures which would suggest that the growth per capital of the euro area, as a whole, is inferior to the US growth per capita.
Data have always to be examined carefully. Even if an overwhelming majority of the GDP of the euro area was set up at the inception of the Euro (the first “11” and then “12” with Greece), the additional 7 (Slovenia, Malta, Cyprus before the Lehman crisis and Slovakia and the three Baltic States after the Lehman crisis), despite the fact that they are small economies, are contributing positively to growth of the whole area because they started from weak situations in terms of GDP per capita. But they cannot explain the significant difference I am stressing between perception and reality of the euro area growth per capita.
It is also often suggested that countries outside the euro area did better, and even much better, than countries inside the single currency since its inception. It is always possible to find a bright European economy out the euro area: Norway or Switzerland, for instance, being certainly cases in point. But I had the curiosity to compare the euro area with the UK over the 20 first years of the euro. Contrary to common belief, the IMF data are giving a significant advantage to the euro area vis-à-vis the UK in terms of growth of GDP per capita, whatever the starting year is. If we trust the IMF figures, the catching up process of the euro area vis-à-vis the UK is visible. At the inception of the euro, the GDP per capita of the euro area was around 21.5% below the UK level. In 2018, the IMF projection put the euro area around 5% below the UK level.
Convergence between members states must make further significant progress
Nominal convergence of inflation and interest rates took place in the period of convergence before of the setting up of the euro. There has been a significant reversal during the financial crisis, particularly as regards interest rates at the time of the sovereign crisis, but has been largely reestablished since.
As regards business cycles, the synchronization of the timing has significantly improved but the amplitude of those cycles has diverged. As regards the timing of financial cycles, they have largely diverged during the pre-crisis boom period in several countries but have since been reestablished. As noted with the business cycles, the amplitude of financial cycles has become more uneven.
It is as regards the real economic convergence of growth and standard of living that the results are most contrasted. Real convergence has not really occurred among the original 12 euro members (including Greece which entered in 2001). In that constituency, GDP growth and productivity growth have not reduced income disparities between high revenue level and lower revenue level countries. In contrast, there has been an impressive convergence for those 7 countries that have joined the euro after it was set up. This puts into question the pertinence of the early economic governance of the euro area and the effectiveness of the implementation of this governance in those early-entry countries which didn’t converge.
If there is no doubt that the single currency offers additional new economic opportunities and additional new potential for growth to all member countries, it clearly doesn’t mean that belonging to a single currency is a guaranty to attaining the highest level GDP per capita. As the US example suggests strongly, a State economic success still depends heavily on the quality of the economic management, on the progress made in terms of productivity and on the level of investment in that State. For instance the State of Mississippi has not the same standard of living as Massachusetts (respectively 31,881 dollars, 65,545 dollars in 2017, according to IMF figures), even if the USA has a single currency, together with an achieved political federation, a federal budget and a functioning single capital market. By the way, according to 2017 IMF figures, the Portuguese or the Greek standards of living (respectively 23,116 dollars, 23,027 dollars) are a little closer to the German one (46,747 dollars) than Mississippi to Massachusetts.
There is undoubtedly an important issue in inequalities in Europe, inside each country and between member countries (like, in the US, within and between States). Economic convergence inside the euro area must be improved, being understood that it is convergence towards full employment with the highest possible GDP per capita which is the goal. This fight to reinforce convergence inside the euro area is of the essence and calls for consolidated and reinforced economic, fiscal and financial governance of the euro area.
The long-term goal of Europeans should be to run optimally their single currency economy, avoiding the kind of sustained divergences that created the sovereign risk crisis and, at the same time, to give all their chances to member countries and to the area as a whole to catch up in terms of job creation and standard of living.
The success of the euro, as a currency, and of the euro area in terms of credibility, resilience, flexibility, popular support and real economy success does not mean that the Europeans should or can rest on their laurels! It is exactly the contrary. They have a lot of very hard work to do to make a full historic success of their extremely bold strategic endeavor. The first 20 years are, in my view, demonstrating that they were right in engaging on what is probably the most audacious economic and monetary structural reform ever attempted in times of peace.
A long-term historic endeavor is necessarily history in the making. I see many avenues for European progress in the years to come. President Macron5 listed recently major multidimensional reforms for the medium-term future of European Union.
First, indeed, one should not forget that European Union has many other dimensions than the economic and monetary ones. Domestic and external security, fight against terrorism, control of the borders, monitoring of immigration, and defense are all areas where it is obvious that there is no pertinent national solutions but possible European correct responses at the level of the continent. It is also comforting to note that there is a large popular support to make progress in these fields, according to the Eurobarometer survey.
Achieve rapidly what has already been decided as regards Banking Union, both in its deposit guarantee and resolution dimensions.
Apply the rules of the two major pillars of economic and fiscal governance: the Stability and Growth Pact (SGP) and the Macroeconomic Imbalance Procedure (MIP), which are equally important.
Design a Minister of Finance of the euro area, who would preside over the Euro Group of Ministers of Finance, would be vice-president of the Commission and would concentrate exclusively on the economic, fiscal and financial governance of the single currency area. I was the first to make this proposal on the occasion of my Charlemagne speech in Aachen in 2011.6
Reinforce the democratic legitimacy of EMU in giving the last word to the members of European Parliament (elected in the euro area) in case there is a conflict between the government of a particular country and the European institutions (Commission and Council) on the implementation of the euro area governance. I made this proposal in 2013.7
Set up a budget of the euro area (still modest at its beginning), which could start as being designed to help problem countries to engage in the needed structural reforms.
The past and present history of European integration proves the truth of the say of Jean Monnet: “Premature ideas do not exist, one must bide one’s time until the right moment comes along”.
I take it that it remains true for the future of Europe.
“The international role of the euro”, July 2017.
Standard Eurobarometer 89, Spring 2018 Public Opinion.
IMF Data Mapper, GDP per capita current prices—WEO, April 2018.
IMF Working Paper—Economic convergence in the euro area: coming together or drifting apart (January 2018).
Emmanuel Macron, President of the French Republic—Initiative for Europe—A Sovereign, United, Democratic Europe (Sorbonne Speech).
Jean-Claude Trichet—« Building Europe, Building Institutions »—Karlpreis speech, June 2, 2011.
Jean-Claude Trichet—« International Policy Coordination in the euro Area: Towards an Economic and Fiscal Federation by Exception »—Journal of Policy Modeling, 2013.