Twenty years of euros: Which predictions have been verified and which have not?

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On New Year’s Day 2002, champagnes opened in twelve EU Member States, celebrating their participation in the single European currency: Germany, France, Belgium, Finland, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Spain and Greece was the first country to introduce the euro as a means of daily payments. It was preceded by a reasonable transitional period, in which the euro functioned merely as an accounting currency. It was a big step towards deepening European integration, but it was also a step towards the unknown. Both the optimists and the “Cassandres” made their own predictions for the future of the single European currency. Let’s see if they were justified in the most important of them.

1. “The euro will become a new reserve currency”. Apply.

In 1997, Fred Bergsten, director of the Peterson Institute for International Economics (PIIE), predicted that the euro would become “at least the second strongest currency in the world,” ending the monopoly of the US dollar. All official surveys and economic indicators today indicate that there is no other serious competitor for the dollar and the euro. Of course, as a reserve currency the dollar remains at the top. According to estimates by the International Monetary Fund (IMF) for the second half of 2021, 59% of monetary reserves worldwide are in dollars, while the euro is in second place with 20.5%. But the dollar’s lead is shrinking if we look at the total trading volume. Recent data from the international interbank payment system SWIFT show that transactions in dollars amount to 39.1% of the total, while those in euros range at 38.1%. In fact, in 2020 the euro had exceeded the dollar.

2. “Sooner or later Britain will join the euro.” Not valid.

Perhaps the most erroneous assessment ever made of the euro. Of course, since the early 1990s, the British have been particularly wary of the single European currency, but there have also been strong supporters. The then Prime Minister Tony Blair said it was in Britain’s own interest to join the eurozone. Prominent representatives of the business world saw the euro as a future parallel currency, which would sooner or later succeed sterling. There was initially talk of a referendum, so that the British themselves could decide whether they want to join the eurozone. Finally, a referendum was held on the question of Britain’s stay in the EU itself. The continuation is well known.

3. “The euro will not be as strong as the German mark.” Not valid.

The Germans were proud of their brand. It was a strong currency, which did not lose its value. In a poll conducted in Germany shortly before the introduction of the euro, only a quarter of respondents estimated that the euro would prove to be as stable as the German mark. Today, however, the euro is proving to be an even tougher currency. From 2002 until today, the well-known euro loses every year only 1.6% of its value, due to inflation. In the brand the corresponding percentage was -2.4%. Of course one needs to be careful when making such a comparison, given that the international environment was different. For example, in the first years after the reunification of Germany, inflation was very high, while from 2007 onwards the international financial crisis, which turned into a debt crisis, caused a drastic and unusual reduction. However, the trend seems to be reversing again, due to the measures against the pandemic.

4. “It is not easy for the countries of the South to devalue the national currency.” Apply.

From the end of World War II until today, the growth rates in the countries of Southern Europe are lower than those in the North. Their national currencies proved to be less stable than the German mark. For the twelve European countries that jointly introduced the euro, their economies grew by 50% after 2002, a rate that is considered satisfactory, although it accounts for only half of US economic growth. However, in most southern countries the growth rates were significantly lower, especially in Portugal and Italy. This is due to the euro crisis that hit these countries a decade ago. At the time of the crisis, the lack of a national currency had dramatic consequences for a country like Greece or Italy. Under different circumstances they could mitigate the negative consequences by devaluing the national currency, as they have done many times in the past. When the drachma or the lira fell against the mark, then Greek or Italian products became cheaper, so more attractive abroad. Holidays for visitors from the north also became more economical. The euro has eliminated this possibility.

5. “Germany and other Nordic countries will have to pay the debts of the economically weaker.” It is valid, but with conditions.

Economists were of one conclusion before the introduction of the euro: for monetary union to work, all Member States must follow a similar fiscal policy and adhere to the “convergence criteria” or “Maastricht criteria” imposed by the ceiling, as a percentage of GDP, for example for the state budget deficit (3%) and public debt (60%). Those interested in joining the euro will have to meet the criteria. Twenty years later it is now clear that almost all Member States are violating the Maastricht criteria, but it is equally clear that this is partly due to the high cost of fighting the pandemic.

The “horror scenario” for Germany and other northern countries was that one day the economically powerful would be called upon to pay for the economically weaker. However, even during the euro crisis, the conclusion of a common debt in the form of Eurobonds was avoided. Instead, the countries of the crisis received loans or guarantees for long-term loans. Only if the guarantees are forfeited will the creditors be called upon to pay. But so far they have not suffered any damage. Probably the opposite happened: until 2018, Germany alone has earned three billion euros in interest on loans granted to Greece. But the pandemic is changing the data. For the first time, eurozone member states are entering into a common debt to finance the Recovery Fund. Proponents of the measure point out that “unusual times require unusual measures.” Critics, on the other hand, speak of the end of “own responsibility” and stylize the first step towards a future “Debt Union”.

DW – Not even Steiner, Andreas Becker / Giannis Papadimitriou

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