Following the Euro Idea

The history of the euro provides a shining example of how economic ideas shape public opinion and how they then, eventually, reshape political and economic institutions. Robert Mundell, a Canadian who won the Nobel Prize in economics in 1999, was the first person to write about the benefits of monetary unions. The project that led to the birth of the euro was inspired by Mundell's ideas and by the acknowledgment of the importance of efficient rules for regulating the interaction between government authorities, like central banks, and the rest of society.

The European Economic and Monetary Union (EMU) was born from the following apparently contradictory argument: that the discretionary powers which governments enjoy over exchange rates and financial markets are often inversely related to their ability to provide stability in those very same markets.

Italy provides a good example of this: before the EMU, the country was plagued by high inflation, high interest rates and a very high cost of government debt which threatened the stability of public finances and the standard of living in Italy. By removing the exchange rate and interest rates from the direct control of Italian authorities, the plague of high inflation and high interest rates disappeared. This does not necessarily imply that Italian authorities were bad or inept, only that the rules governing monetary and fiscal policymaking in Europe before the EMU were no longer appropriate for the highly fluent capital markets that had developed over the previous two decades.

The euro also provides important insights into the politics of economic reform. Interest groups for or against the euro project were never able to coalesce and harden into fixed proponents or opponents because both the economic benefits and costs imposed by the euro are diffuse. The groups for or against the euro changed over time and were different from country to country.