The Euro Gamble — One Currency, Many National Budgets

In the previous episode we watched the Single European Act bring down the walls of national borders, and the Maastricht Treaty give birth to the vessel called the European Union. People, goods, money, and services came to move freely across the continent. Yet one last border remained untouched: the national currency each country held in its hand.

A currency is no mere scrap of paper or piece of metal. The French franc, the German mark, the Italian lira — they were national sovereignty itself, and history, and a symbol of pride. For Germany above all, holder of the especially strong mark, to let go of it was a momentous decision.

To tear down that wall and have Europe share a single purse — that was the common currency, the euro. It was a grand gamble that economic logic alone could not fully explain, sustained by political will.

The Euro on the Ledger, the Euro in the Wallet

The euro entered people’s lives in two stages.

First, in January 1999, the euro was born on the ledgers and in the foreign exchange markets. At this point the participating nations’ currencies were fixed at set conversion rates against the euro, and the euro could be used for ‘cashless settlements’ such as bank transfers and securities trading. But the contents of people’s wallets were still the banknotes and coins of each nation. The mark and the franc became something like ‘units’ hanging beneath the parent currency, the euro.

Then, in January 2002, euro banknotes and coins at last began to circulate. People brought their marks, francs, and lire to the banks and exchanged them for euros. After a transition period of several months, each nation’s old currency lost its standing as legal tender. Currencies used for centuries vanished, and the contents of one’s wallet turned overnight into something common to Europe — for many citizens, it was an event in which they felt integration on their own skin.

As the command center supporting this vast currency, the European Central Bank (ECB) was established in Frankfurt, Germany, in 1998. The ECB took sole charge of monetary policy for the entire euro area, setting interest rates with price stability as its foremost mission. The central banks of each nation relinquished the authority to move their own interest rates and came to follow the ECB’s decisions. It was the moment the sovereignty of currency shifted from each nation’s capital to Frankfurt.

The Qualification to Pass the Gate — The Convergence Criteria

Not everyone could join the euro at once. To protect the trust placed in the common currency, participation demanded a certain ‘soundness.’ These were the convergence criteria laid down by the Maastricht Treaty.

In other words, the euro was not merely a mechanism for sharing a currency, but also a framework demanding common fiscal discipline of its participants. Only nations that met the criteria were permitted to pass through the gate; those that could not were left to wait outside. This very discipline was supposed to guarantee the stability of monetary union.

Even so, it is pointed out that in reality there was latitude in how the criteria were applied. Some nations, it is said, dressed up their figures temporarily to make it in, and even for the debt criterion a flexible reading was used, holding that ‘it suffices if the ratio is heading toward reduction.’ The gate that looked strict was, in practice, opened with a certain elasticity — and how this looseness would later resound is a matter on which assessments diverge.

One Currency, Many Separate Budgets

The euro carried, from the design stage, one fundamental tension that had been pointed out.

Though the currency was unified into one, fiscal policy — that is, the decision of how much tax to levy, where and how much to spend, and how much to borrow — was still left in the hands of each nation. While the ECB imposed a single interest rate on the entire euro area, the economic conditions and fiscal soundness of the nations beneath it differed greatly from one another.

This ‘structural risk’ sank beneath the surface in the era of prosperity. In the years after the euro’s introduction, Europe enjoyed comparatively stable growth, and the common currency was spoken of as a success story. The nations of southern Europe, too, came to borrow money at low interest rates on par with Germany and basked in the boom. But in some nations, it is said, the funds gathered at low interest invited the swelling of real estate and debt, and distortions piled up out of sight.

The gamble of unifying the currency looked, in times of peace, like a magnificent symbol of integration. The question was whether the mechanism could hold when the storm came. The answer would be thrust forward only a little further down the road.

The Outcome of the Gamble Is Not Yet in Sight

The euro was the boldest step that postwar European integration had reached. Each nation, of its own will, let go of the currency sovereignty that lies at the innermost core of a state and entrusted it to a single central bank. There is almost no precedent in history for achieving integration this deep not through conquest by war, but through dialogue and treaty. That in itself can be seen as another fruit of the dream of never waging war again.

At the same time, the euro was an experiment that set sail while still unfinished. The currency was bound together, but fiscal policy was not. Discipline was imposed, but preparation for crisis could not be called sufficient. The gap left between ideal and reality would someday be put to the test — and Europe, wrapped in optimism at the time, was not yet strongly conscious of it.

Having crossed the last wall of currency, the EU was now turning its gaze in another direction. With the collapse of the Iron Curtain, the long-divided neighbors of the east were knocking at the door, wishing to join the house of Europe.