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The Euro’s Final Countdown?

The introduction of the euro in 1999, it was claimed, would narrow the economic differences between the member countries of the monetary union. Unemployment rates would converge, as would other important macroeconomic variables, such as unit labor costs, productivity, and fiscal deficits and government debt. Ultimately, the differences in wealth, measured in terms of income per capita, would diminish as well.

After the common currency’s first decade, however, increased divergence, rather than rapid convergence, has become the norm within the euro area, and tensions can be expected to increase further.

The differences between member states were already large a decade ago. The euro became the common currency of very wealthy countries, such as Germany and the Netherlands, and much poorer countries, such as Greece and Portugal. It also became the currency of the Finns, runners-up in innovation and market flexibility, and of Italy, which lacked both, earning the apt moniker “the sick man of Europe.”

Such differences were a highly complicating factor for the newly established European Central Bank (ECB), which had to determine the appropriate interest rate for all members (the so-called “one size fits all” policy). The larger the differences have become during the euro’s first decade, the more the ECB’s policy could be described as “one size fits none.”