ZEW Economist Friedrich Heinemann on 20 Years of Euro Cash

1 January 2022 will be the twentieth anniversary of the introduction of euro banknotes and coins. The changeover to the euro, which had already taken place three years earlier, was thus fully completed. Professor Friedrich Heinemann, ZEW research department head, has scientifically accompanied the introduction of the euro. He assesses the success of the euro as follows:

“The euro has undoubtedly made business and travel in Europe easier and helped to further strengthen trade in the European Single Market. Europe’s currency has so far also been able to remain stable as promised. Since the introduction of the euro, the inflation rate in the eurozone has hovered at a moderate level of two per cent. For Germany, too, the euro has proven to be a stable currency, as there were higher inflation rates on average in the Deutsche Mark era than in the period since 1999.

Nevertheless, there is no reason to celebrate the euro’s birthday joyfully. Europe’s single currency has not been able to fulfil central economic hopes. For Southern Europe, it has not brought the desired sustained upswing. After a few good years, the euro has instead ushered in a long phase of stagnation and crises for countries like Italy and Greece. The Eastern European Member States that did not join the euro have left the Southern Europeans far behind in terms of growth.

But also from a Northern European perspective, the euro could not keep its promises on important issues. The Maastricht Treaty tried to bring the euro countries to fiscal discipline with an exclusion of liability, a ban on monetary state financing and with the European fiscal rules to prevent the communitisation of debt and the establishment of a transfer union. These precautions have failed to achieve their goal. Some Southern European states are now dependent on extensive financial aid and guarantees from the ECB and the EU to manage their debt levels.

It is striking that the monetary union has lost its appeal for the economically successful Eastern European states. The increasingly prosperous states of Poland, Hungary and the Czech Republic are no longer seeking to adopt the euro, partly because they do not want to be held liable for Southern European debts.

Whether the euro will continue its previous success in terms of stability is now more uncertain than ever. Admittedly, the currently very high inflation rate is partly the result of temporary factors. However, scepticism has grown as to whether the ECB is determined enough to be able to fight this unexpected high inflation. After all, its loose monetary policy plays a key role in financing highly indebted countries. The euro’s success story is not unblemished. Policymakers should admit this to themselves and work resolutely to change the monetary union’s regulatory framework for the better.”