The 20th anniversary of the founding of the euro comes as the currency is established in 19 countries and is a widely accepted means of exchange internationally. Predictions from sceptics that it would not last the pace have proved unfounded. However it is still only six years since European Central Bank president Mario Draghi had to lay the bank's reputation on the line by saying that he would do "whatever it takes" to protect the euro. That he was forced to do so reflects the cracks which appeared during the economic crisis and the fact that the euro is still an unfinished project.
When EU leaders, led by Germany's Helmut Kohl and France's François Mitterrand, set the timetable for the launch of the euro at the Maastricht summit in 1991, they saw it as a step which would inevitably lead to closer EU political and economic integration. The founding of the single currency and a single central bank was indeed a landmark moment for the EU and has delivered significant gains for businesses and consumers.
However, as moves towards closer integration floundered in recent years, the crisis exposed the euro’s fault lines. Some of these had been anticipated at the currency’s foundation. The euro zone includes diverse economies subject to different cycles and has no large central budget. The countries which were hit hardest during the crisis were left particularly exposed. The ECB’s delay in recognising the extent of the crisis and the lack of fiscal coordination across the EU made the crisis deeper and longer than necessary.
The crisis also exposed another flaw which had not been generally foreseen when the euro was founded – the exposure faced by individual countries due to the mobility of international capital and the lack of a banking union. Nowhere was this felt more seriously than in Ireland.
The EU has moved to address many of the faults, tightening budget rules and the regulation of banks and moving towards common protection mechanisms. However, the move to a banking union is not complete and instability in the financial sector remains a threat. Meanwhile events in Italy show how populist demands to loosen budgetary controls can also raise serious questions. Work remains to be done to underpin the euro's future – and in the current political environment this will not be easy.
The euro has implications for our national economic policy, too. With interest rates controlled from Frankfurt, there is more pressure on Government budget policy as the main domestic tool to affect the overall level of economic activity. Big mistakes were made in the run up to the crisis which left us exposed. In this context it is welcome that the budget moved into surplus last year, but still a concern that this happened only because of an unexpected surge in corporation tax payments.