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The Failure of the Euro
The Little Currency That Couldn’t
MARTIN FELDSTEIN is George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He was Chair of the Council of Economic Advisers from 1982 to 1984. This article is adapted from an NBER working paper, “The Euro and European Economic Performance.”See more by this author
The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.
The political goal of creating a harmonious Europe has also failed. France and Germany have dictated painful austerity measures in Greece and Italy as a condition of their financial help, and Paris and Berlin have clashed over the role of the European Central Bank (ECB) and over how the burden of financial assistance will be shared.
The initial impetus that led to the European Monetary Union and the euro was political, not economic. European politicians reasoned that the use of a common currency would instill in their publics a greater sense of belonging to a European community and that the shift of responsibility for monetary policy from national capitals to a single central bank in Frankfurt would signal a shift of political power.
The primary political motive for increased European integration was, and may still be, to enhance Europe's role in world affairs. In 1956, just after the United States forced France and the United Kingdom to withdraw their forces from the Suez Canal, German Chancellor Konrad Adenauer told a French politician that individual European states would never be leading global powers, but "there remains to them only one way of playing a decisive role in the world; that is to unite to make Europe. . . . Europe will be your revenge." One year later, the Treaty of Rome launched the Common Market.