When Euro bills and coins were launched into circulation on New Year’s Eve in 2002, excitement was roaring through the streets of Europe as people rushed to cash machines to hold the new unified European currency in their hands. The Euro was a symbol of European integration and economic flourishing. However, this initial excitement did not last long, and the weaknesses of the single currency and the European Economic and Monetary Union (EMU) quickly became evident. The Euro has been on a roller coaster ride since the sovereign debt crisis faced in January 2010 as it was blamed for exacerbating the global downward spiralling financial crisis and a bursting European credit bubble. The Eurocrisis and its aftermath were also evident in the 2014 parliamentary elections. The looming contagion of the Eurocrisis to the vitality of the European Union in itself makes this problem one of the largest, if not the most important crisis in the history of the European Union. Although the crisis is officially over since 2018, economists expect the EU to be heading into another financial crisis sooner than later because of the asymmetric design of the currency. Many critics argue for the dissolving of the Euro into national currencies. However, this would create an avalanche of new problems for both, the union and its member states. Instead of disintegrating, it is worth fighting for the Euro and the European identity it entails by reforming it. A lot of academic work has been dedicated to exploring potential economic reforms, such as the contested proposal of the creation of a fiscal. (See Article by Rado Baarda). However, the predicament the Euro is facing is not solely dependent on the economic shortcomings of the EMU. Currency has and always will be deeply intertwined with political dynamics. The lack of political embeddedness of EMU institutions is integral to the instability of the Euro, highlighting the necessity of political reforms just as direly as economic ones in order to ensure the survival of the Euro.
The idea of a common European currency has been circulating in academic and political circles since the ’60s. However, it was only in the late ’90s that the implementation of such a project took place. The breakdown of the communist regimes and the reunification of Germany provided political momentum for the construction of a European Monetary and Economic Union (EMU) with the Euro as its currency. To make use of this brief window of opportunity, the architects of the EMU acted quickly without having a full framework of political and economic institutions in which the currency was to be embedded in. This lack of political embeddedness was deemed detrimental when the EMU was faced with the sovereign debt crisis in 2010 and its aftermath.
Markets function only if they are embedded within a larger network of formal and informal institutions of political authority. Rather than only focusing on the optimal economic conditions necessary for a monetary union to function, it is additionally important to understand the minimum requirements of governance and institutions necessary to provide ample and stable foundations for the single currency to flourish. McNamara developed these minimum institutional requirements into the Embedded Currency Area (ECA) theory. The ECA functions as the political counterweight to the economic Optimal Currency Area (OCA), a theory that is heavily integrated into academic research. In short, the ECA theory focuses on four main parts on the institutional embedding of currency zones, namely the need for a legitimate generator of market confidence and liquidity, an institution for fiscal redistribution, a financial and banking union to regulate financial risk and lastly, there is a need for a robust and overarching political union providing solidarity between the member states and establishing democratic legitimacy.
The EMU has proven most sustainable within the field of a legitimate generator of market confidence and liquidity by setting up numerous institutions such European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). However, the most notable and significant institution is the European Central Bank (ECB), designed in the Maastricht treaty as a hyper-independent central bank to protect the value and minimize inflation of the Euro. This institution is highly effective, as seen in the Greek sovereign debt crisis, in which the ECB provided stability on an economic and political level, furthering European integration.
However, besides the existence of a strong and legitimate generator, the EMU is majorly lagging behind in terms of having the institutional setup of a fiscal and economic union. The EMU completely lacks a fiscal and economic union responsible for the extraction of revenue through taxes, redistribution of money through public spending, and accumulating additional funds through public debt instruments. Instead of having a coherent and legitimate institution, the EMU manages these responsibilities through “structural fond programs” that are inefficient and asymmetric between member states. This economic and political dilemma leaves the stability of the Euro vulnerable.
Another element of institutional embeddedness necessary to sustain a common currency is a banking and financial union. The EMU has been working consistently to establish such governance structures, but the progress is slow and slacking due to the resistance of member states such as France and Germany to give up political autonomy to Brussels.
Lastly, one of the biggest political shortcomings of the Euro is the lack of an overarching, robust political union to provide stability to the currency union. The lack of such an underlying union reflects in the larger insufficiency of social solidarity and legitimate political structures within the EU. With the global COVID-19 Pandemic at hand, the Euro is facing further challenges, making the process of forming such a political union in the name of solidarity increasingly difficult as the crisis drags on.
The minimum requirements of governance and institutions in the EMU are hence fundamentally lacking, explaining the instability of the Euro. This gives rise to the question as to why fight for a project that is seemingly unsustainable in the long run? If the Euro is deeply flawed in the political and economic realm, why should reform efforts be made in the first place? One reason that we, as EU citizens, should fight for the saving of the Euro is that the Euro plays a big part in European Identity creation. The collective currency reminds Europeans and those immigrating into Europe of their unity every single day, benefitting from an interconnected system of peace and harmony. Rather than declaring the end of the EMU and disintegrating from the EU, the Euro crisis offers a unique opportunity to manage and improve the widely known institutional flaws of the currency, which, for political reasons, were not able to be tackled in the early years of the euro creation. As Albert Einstein famously said, “In the midst of difficulty lies opportunity.” Disintegration is not the solution. The Euro is worth fighting for.