Fifteen Eighty Four

The euro crisis is currently in a chronic rather than an acute phase but the extraordinary confrontation between Greece and its creditors in 2015 showed how readily it could flare up again.

The sources and nature of the troubles that have beset the monetary union since 2010 are complex. My purpose in writing The Euro Experiment has been to offer an analytical guide to the crisis, providing a longer historical perspective and also assessing the steps taken in the past five years to try to overcome the original defects in the currency union.

Six Crises

“…households and companies borrowed unwisely during the first decade of the single currency.”

I argue that the euro crisis was in fact a combination of six crises.

First, it was a sovereign-debt crisis as one country after another on the periphery of the euro area became unable to finance themselves in the markets, starting with Greece in the spring of 2010. But whereas the Greek government’s loss of market access was rooted in fiscal improvidence, the difficulties of countries such as Ireland and Spain arose mainly because of the imprudence of banks, the second dimension to the crisis.

Third, there was a broader macroeconomic crisis as imbalances that emerged in the first decade of the euro – big current-account deficits among peripheral countries along with a loss of competitiveness – had to be rectified.

A fourth feature of the crisis was the build-up of excessive private as well as public debt across much of the euro area, as households and companies borrowed unwisely during the first decade of the single currency.

Fifth and most fundamental of all, the crisis was one of political economy as the institutional shortcomings of the euro, uniquely a monetary without a corresponding fiscal and political union, were laid bare.

That in turn left the project vulnerable to political risk, the sixth crisis highlighted in the perilous stand-off between the Greek government and other members of the euro area led by Germany in 2015.

An Economic Paradox

The interplay between all six crises was pernicious since they tended to reinforce rather than to mitigate one other. Making matters trickier still, the euro crisis threatened to become existential if the exit of one country precipitated a wider break-up with dire economic consequences.

Paradoxically, that was one reason why the euro area did not fragment as had at times seemed likely. Another was the reinvention of the ECB as a more proactive central bank under the leadership of Mario Draghi whose “whatever it takes” pledge in 2012 was crucial in preventing the markets from cracking open the currency union. The decision to make the ECB the single supervisor for euro-zone banks was a further important counter-measure, as was the creation of a permanent rescue fund.

Despite these steps to shore up the shallow institutions of the euro area it still lacks the deeper foundations of a fiscal and political union.

A recovery has been under way since the spring of 2013 but it has been faltering and pallid. As long as growth remains lacklustre and unemployment high the monetary union will remain vulnerable to political upsets. The overall performance of the euro area since the single currency was created in 1999 has been poor.

The monetary union has managed to stick together but survival is not enough.