Illustration ECOTVWeek Jan 2021

 

Twenty years ago, on January 1st 2002,  the biggest cash changeover in history took place. Citizens in 12 European Union countries exchanged their national notes and coins into euros: the physical euro was born. The euro had been launched three years earlier with the participating countries fixing the  exchange rate of their currencies, adopting a shared monetary policy under the European Central Bank and launching the new currency – the euro – on global financial markets. Since then, the number of countries adopting the euro has grown considerably and today 19 European Union countries are using the euro, that is a total of 340 million people. The popularity of the euro, after dropping unsurprisingly during the sovereign debt crisis, has made a tremendous comeback in recent years and in the most recent euro barometer survey conducted in the autumn of 2021. It turned out that 78% of the eurozone people are in favour of the euro, supporting the common currency.

Looking back at the first 20 years of the euro, a distinction can be made between three phases. The first one more or less corresponds to the first decade of the existence of the euro. It is a period of quite satisfactory economic growth,  inflation not being too much a problem for the European Central Bank, but also gradually a buildup of imbalances. Growth was actually driven in a number of countries to a large degree by the property sector and that led to a boom in housing activity but also in property prices, think of Spain think or Ireland. In addition, we also observed that financial market investors were kind of seizing the opportunity provided by the introduction of the euro by driving spreads down further and further to the extent that risk actually was no longer being priced. That meant that the resilience to face economic shocks was resting on very shaky grounds as we had observed in the sovereign debt crisis, that is the second phase. The sovereign debt crisis came right upon the heels of the global financial crisis in 2008 -2009, but in the sovereign debt crisis we saw the consequences of an absence of resilience with a financial fragmentation, borrowing conditions that became incredibly expensive and a fiscal policy that was clearly inappropriate as it turned out subsequently.  It really required major initiatives and this is something that we have seen on other occasions: when conditions really got tough you do see that policy initiatives that were kind of unthinkable before were actually being adopted. We saw the introduction of the banking union but we also see for instance the ECB’s role. Think of the Mario Draghi’s speech in July 2012: “we will do whatever is necessary“. That was a key announcement made to bring  some degree of stability in sovereign bond markets. What followed was a period where gradually things kind of stabilized  but also characterized by low inflation (or disinflation actually actually) and it meant that the ECB was again forced to take extraordinary measures, bringing policy rates below zero but also introducing quantitative easing. The third phase is the one that started with the pandemic and the policy that was necessary to address the fast economic consequences of the pandemic: the fiscal risk sharing between countries within the European Union as you have seen with the launch of Next Generation EU and the fiscal transfers that have been introduced to the various EU countries.

Looking ahead, what can be expected in terms of developments for the euro in the next several years. First of all, the digital euro. This is a fascinating potential development. Let’s not forget that 20 years ago, we found in our wallets euro notes and coins ; now the digital euro is a project that could lead to the introduction by the European Central Bank of a digital euro that we would find possibly in our digital wallets. The process is on the way and it will take several years but it’s an important development. In addition to that, we have to think about economic policy, finalizing the banking union and also making swifter process (because progress has been too slow) in terms of capital markets union.  It is important for the funding conditions of governments and in particular of companies especially small and mid-sized companies. And then, there is the issue of economic governance, an economic governance that goes far beyond monetary policy. When people think about the euro,  they often associate it with the European Central bank and with monetary policy ;  however the strength, the attraction of the euro on international markets and with foreign direct investments, the resilience of the euro area depends on economic governance and economic policy in general. That is not only monetary policy, it is also about fiscal policy and about structural economic policy. There is a certain irony to be noted here:  when going back to the 90s, what we observed is that many countries were actually accepting external pressure to make sure that the necessary policy was being followed to become a member of the euro area. Today, it is far more difficult to agree amongst the euro area members on what type of pressure is acceptable and needed to steer national policies in the direction which is necessary and that would be beneficial to all euro area countries.