Success or failure?

Exactly 10 years ago, the euro was introduced as a common currency in 12 European countries. Starter kits were handed out to people ahead of the euro introduction so that they could become familiar with the new coins. The euro notes and coins were formally launched as a currency in the eurozone on January 1, 2002.

Four years earlier, in 1998, the European Central Bank was founded. The bank was based on the model of the German Central Bank, the Bundesbank, following demands by the German government, which sought to ensure monetary stability. If inflation and exchange rates are the benchmarks, the euro can be viewed as a success, compared to other currencies.

Until now, the ECB has steered securely through the turbulence on currency markets. On its first trading day on January 4, 1999 after being introduced in 11 countries as a deposit currency, the euro traded at 1.18 US dollars. European politicians and economists, however, became nervous when shortly afterwards the euro exchange rate began a steep and steady decline. In October 2000, it reached an all-time low of 82 US cents per euro.

Weak links

Currency markets have a very good nose for sensing whether policymakers are on the right path toward strengthening a currency, analysts argue. They point to decisions that allowed Italy, for instance, to sidestep stability criteria and plunge deeper into debt or Greece to join as the 12th member of the eurozone.

Greece should never have been allowed in the monetary union, concedes Theo Waigel, who was the German finance minister in the 1990s and participated in the euro introduction negotiations.

"What we have are financial problems in some countries caused by the financial crises of the past 80 years and also by the mistakes of some countries," he said. "We don't have a problem with the currency as such but with these specific countries."

In other words, there is no euro crisis. Although many countries in the eurozone have massive debt problems, the euro has proven itself as a currency. It has saved companies billions in transaction costs. It has resulted in booming exports for the German industry and given peripheral countries low interest rates for many years. It is the world's second most important reserve currency after the US dollar. And despite all the turbulence, it has remained stable against the dollar.

Anyone doing business in dollar-based regions or vacationing there, of course, is interested in the strength of the euro, but most people are concerned with its stability. Especially in Germany, the euro was viewed initially as a currency that pushed prices up. And it is still seen so today by many consumers, although the statics speak another language. In the 10 years of the euro, inflation in the eurozone has been lower than it was when the deutschmark was the official currency.

Don't blame the euro

Economists largely agree that the euro is also not the cause of the financial problems in several eurozone countries.

"The problems of the southern European countries, especially Greece and Portugal, are homemade," writes the Cologne Institute for Economic Research. After all, according to the institute, the introduction of the euro created a huge opportunity for countries in trouble today, such as low borrowing rates for government bonds.

Yet few of these countries took advantage of the opportunity. Instead of making investments focused on economic growth, Greece and Portugal increased social program spending. In Greece, for instance, spending on social programs rose from 19 percent of Greece's gross domestic product in 1995 to more than 25 percent in 2007, according to the research institute.

What went wrong

Low interest rates led to excessive borrowing on the part of governments, companies and consumers - and to an artificial, credit-based economic boom that allowed prices and wages to rise much faster than in other eurozone countries. This, in turn, resulted in higher imports and lower exports, and to an economic bubble that finally burst when the capital markets refused to finance the huge trade deficits without any significant risk premiums.

These are reasons why a number of eurozone countries with their excessive prices and wages are in a deep structural crisis today and are not competitive. What they actually need is for the euro exchange rate to be readjusted for each of them individually, a devaluation that would make competitive again.

But this isn't an option in the euro system. No single eurozone country can singlehandedly devaluate the currency. All of the countries are in the same boat. That's the other side of the euro.

Author: Rolf Wenkel / jrb
Editor: Andreas Illmer