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The Euro’s First 20 Years

According to public opinion polls, 20 years after its introduction, the euro is highly popular, with 64% of eurozone citizens supporting the common currency. This offers hope that, if the eurozone’s leaders can learn from past mistakes, the monetary union will survive and even thrive in the future.

CAMBRIDGE – Since its introduction two decades ago, the euro has faced serious challenges. So far, it has survived intact. Yet, on the common currency’s 20th anniversary, it is worth identifying problems that have been encountered and, one hopes, to learn from past mistakes.

A first critical problem was inherent in the application of a common currency to a large and varied set of countries: They did not meet the criteria for an “optimum currency area,” as American economists pointed out. In particular, the members lacked cyclical synchronization. It is much harder to go without monetary independence if your economy’s needs are not aligned with those of the other countries in the union.

In 2004-2006, for example, Ireland needed a tighter monetary policy than the European Central Bank was prepared to set, given a housing bubble and economic overheating; but it had ceded the authority to revalue its currency or raise interest rates. Likewise, in 2009-2013, when Ireland needed an easier monetary policy than the ECB’s, given a steep recession, it was unable to devalue its currency, print money, or lower its interest rate.