The Euro at Twenty: Follies of Youth?

Abstract

This paper overviews the early history of the euro and argues that the euro was suboptimally designed, without monetary sovereignty of Eurozone (EZ) Member States, in order to comply with political goals set by wealthier Member States. Given this constraint, the euro architects designed a single currency in which its irreversibility is achieved through the EZ banking system, with recourse to the TARGET2 payment system. This allowed the banking systems of deficit Member States to fund large cumulative current account deficits in the first decade of the euro. The euro crisis led EZ policy makers to define new far more demanding fiscal rules and a new Banking Union to constrain the ability of EZ banking systems to fund sovereigns and current account deficits. Thus, the euro at twenty has become more fragile.JEL classification: F45, F32, F34, E62, E52, F36, F42

The Euro at 22: economic crisis and political instability

“…Member States have therefore lost all decision-making powers over supervision and intervention in the largest national banks but remained financially responsible for the decisions of the Single Resolution Mechanism. Regardless of its incompleteness, by constraining the State's policy instruments to respond to banks in difficulties, the Banking Union exerts an influence over national banks' willingness to promote excessive credit creation or to finance expansionary fiscal policies (Cabral and Louçã, 2019). On the other hand, there is no guarantee that Council decisions on the liquidation or resolution of a national bank will correspond to the specific interests of a country or region.…”