Hu Kun: The euro has been in the past twenty years, all the way through successive crises

Source: Global Times

On January 1, 2002, euro banknotes and coins began to be issued and circulated, and after a two-month transition period of dual currency circulation, they officially replaced the national currencies of the member states. Today, 20 years later, the eurozone has expanded to 19 EU member states, covering a total population of more than 340 million, and another 7 EU member states are required to join the eurozone when conditions are ripe. The euro has become one of the important symbols of the European Union.

The emergence of the eurozone is directly linked to the European integration process. In the 1960s, with the deepening of the process of European integration, the international capital flows within the European Community became increasingly prominent, and its monetary system was gradually challenged by the "ternary paradox", that is, the stability of the exchange rate, the free flow of capital and the independence of the monetary policy of various countries could not be combined. In view of the fact that the free flow of capital is one of the objectives of the European Common Market, and the sharp and frequent fluctuations in the exchange rate between currencies of various countries will seriously hinder the operation of the common market, the establishment of a monetary policy coordination mechanism, that is, the promotion of monetary integration, to ensure the free flow of capital and the stability of the exchange rate has become an inevitable choice for the European Community countries in line with economic logic.

The introduction of a common currency means that member countries lose their monetary policy sovereignty, and the exchange rate between currencies will henceforth be permanently fixed, which must meet certain prerequisites, that is, to meet the requirements of the "optimal currency area" as much as possible. However, on the one hand, the macroeconomic conditions of the members of the common monetary area are very different, and the impact of various types of economic shocks on each country is also very different, and it is impossible to respond to them with common policies; on the other hand, if countries cannot implement independent monetary and exchange rate policies, and cannot use other regulatory mechanisms such as factor flows of production, flexible wages and prices, or unified fiscal policies to calm this asymmetric shock, the costly economic imbalances will emerge within the common monetary area.

Euro infographic

Although many studies at the time suggested that the EC was far from the requirements of an "optimal currency zone" and that the time was still not ripe for the introduction of a common currency, the establishment of the European Monetary Union was enshrined in the Maastricht Treaty in 1989, driven by historical opportunities such as German reunification and strong political will. On 1 January 1999, the euro, which covers 11 EU member states, was born as the unified currency of the European Monetary Union. Monetary policy in the euro area is the responsibility of the Euro System, which is composed of the European Central Bank and the central banks of the euro area countries, and the ECB, as the core of this system, has legal guarantees to ensure the realization of price stability, the primary objective of eurozone monetary policy.

The structural flaw of not meeting the requirements of an "optimal monetary area" led to the accumulation of imbalances within the eurozone, which eventually fell into a huge predicament under the impact of the 2008 international financial crisis. After the outbreak of the crisis, the bank-led EU financial system was greatly impacted, but under the discrete banking regulatory system, the operating conditions of banks in member countries varied widely, and the impact of the crisis was also different, there were significant differences in changes in consumption and investment, superimposed on the existing imbalance risks, the gap between economic growth and employment levels widened sharply, and macroeconomic imbalances intensified. Faced with this challenge, the eurozone's unified monetary policy is helpless, and other regulatory mechanisms are lacking, and some of the hard-hit member countries have launched expansionary fiscal policies in response to the crisis, resulting in rising public debt levels, which has triggered concerns about their fiscal unsustainability, and eventually the Greek sovereign debt crisis, which has spread to other fiscally sound countries. While EU national bonds are mainly held by European banks, the panic caused by the cancellation of sovereign debt due to bank asset write-downs began to spread in the European financial market, and eventually escalated into a vicious circle of sovereign debt crisis and banking crisis, almost leading to the disintegration of the eurozone.

After the crisis gradually subsided, while strictly enforcing fiscal discipline and plugging the institutional loopholes that directly triggered the outbreak of the sovereign debt crisis, the EU introduced a series of structural policies, including banking unions, capital market unions, macroeconomic imbalance procedures, excessive imbalance procedures, European structures and investment funds, European investment plans, European stability mechanisms and direct currency transactions, while starting from the fact that the euro area is still an "optimal monetary area", to alleviate the asymmetric impact of peaceful external shocks on the monetary union and resolve the risk of imbalances. Push the eurozone towards an "optimal currency zone". In particular, the European Commission's "Next Generation EU" plan on 27 May 2020, a new eu-level fiscal transfer mechanism, is a key step towards an "optimal currency area" for the eurozone.

Of course, institutional construction cannot be achieved overnight, the uncertainty of the international economic environment brought about by the impact of the epidemic and anti-globalization is huge, and the future of the euro area has a long way to go. However, the performance of the eurozone in the past crises has given us reason to have confidence in the euro. We also see that since the end of 2018, the EU is committed to further enhancing the international monetary status of the euro, and a more competitive euro can not only enhance the EU's ability to cope with external shocks, but also help to ensure the stability of the international financial and monetary system and promote a more open and diversified world economy and trading system. (The author is an associate researcher at the Institute of European Studies, Chinese Academy of Social Sciences)