15 Mar 2019
CASE Report No. 497 "The Economic and Monetary Union: Past, Present and Future"
Twenty years of euro history confirms the euro’s stability and position as the second global currency. It also enjoys the support of majority of the euro area population and is seen as a good thing for the European Union. The European Central Bank has been successful in keeping inflation at a low level. However, the European debt and financial crisis in the 2010s created a need for deep institutional reform and this task remains unfinished.
Executive Summary
- The road to the European currency took more than 20 years from the first memorandum of the European Commission on this topic in 1969 and the Werner Report in 1970, to signing the Maas-tricht Treaty in 1992. It took nearly 30 years until the euro was launched on 1 January 1999. This road was not easy. The collapse of the Bretton Woods system in 1971, two oil price shocks in the 1970s and the resulting stagflation delayed political approval of the project by more than a decade. Then the crisis of the European Monetary System in 1992–1993 complicated Stage 1 of the preparatory phase.
- The first two decades of euro functioning confirmed its stability, its role as the second most impor-tant global currency, and the ability of the European Central Bank (ECB) to keep inflation low. The euro enjoys the support of the majority of the euro area population and is seen as a good thing for the European Union (EU).
- In most of its first decade (1999–2008), the European economy enjoyed high growth and macro-economic and financial stability. This changed, however, in the second decade (2009–2018) when the global and European financial crises hit the European economy. The monetary response of the ECB was largely adequate – the euro area managed to resist deflationary pressure coming from a far-reaching financial disintermediation. However, countries which suffered from a sovereign debt or banking crisis (or both) had to resist market pressures on their exit from the euro area. Greece, which experienced the longest and most painful crisis, found itself on the verge of leaving the euro area in July 2015, which was eventually avoided by the third rescue package provided by the European Stability Mechanism (ESM).
- All crisis-affected countries that lost market access received a conditional bailout provided by oth-er euro area countries and the International Monetary Fund, with the support of the ECB. This meant, however, circumventing a no-bailout clause in the Treaty on the Functioning of the Euro-pean Union. The content of rescue packages and how they were delivered remains a subject of political, economic and legal controversy until now.
- The crisis experience triggered a series of institutional reforms in the EU and euro area. They in-cluded, among others, strengthening the Stability and Growth Pact (SGP) and adopting the Fiscal Compact, introducing national fiscal rules, launching the Macroeconomic Imbalance Procedure and European Semester, setting up the ESM and Banking Union (without the European Deposit Insurance System (EDIS), which is still a subject of political discussion).
- The reform of the euro area needs to continue. The reform agenda was elaborated in the Five Pres-idents Report in 2015. However, there is a lack of consensus with respect to several proposals, for example, the degree of further fiscal and political integration, debt mutualization, the euro area budget, financial instruments which could cushion asymmetric shocks, etc.
- Given the high level of public debt in several euro area countries and the fiscal roots of most crisis episodes, strengthening fiscal discipline is the most important task. This can be done by restoring the no-bailout clause (market discipline) on the one hand and simplifying the SGP on the other.
- The EU member states that remain outside the euro area should consider euro adoption in the not-so-distant future. This would make the EU more homogenous economically and politically and help avoid institutional problems related to multi-speed integration.
