Ultimately, the euro was a brave experiment on a grand scale. At its birth, many economists on both sides of the Atlantic (but mostly on the west side) were deeply sceptical and predicted its quick failure. Yet, on its 10th birthday, the euro appeared robust and successful. It had been a good decade.
This cannot be said of the euro’s second decade, in which a sovereign risk crisis spread across the area producing economic and political fragmentation, and leaders were seen climbing summit after summit just to deliver the minimum necessary reforms and funding to prevent the union from falling apart. Against many odds, they succeeded – doubtless with the help of Draghi’s famous “whatever it takes” speech – in spoiling the many bets on the euro’s demise.
The Covid-19 pandemic provided another large-scale test of the system, and the Russian war of aggression in Ukraine is the latest in a series of negative economic shocks, this time also contributing to high inflation. The ECB had to quickly navigate away from the risks of stagflation while at the same time avoiding the substantial fiscal implications of rising interest rates. Today, however, the response to inflation by the ECB internalises the euro-wide effects of its policy decisions. Its determination to avoid inefficient divergence in the transmission mechanism – motivating the Transmission Protection Instrument (TPI) – reflects the much higher level of cross-border cooperation that a common currency requires.
This should not be taken for granted. Conflict and controversies over joint policy measures are still divisive. But as recent history shows, there is hope that crises will once again be resolved in the future.
Editors’ note: The contributions in Corsetti et al. (2023) came out of a webinar organised by CEPR, in collaboration with the Pierre Werner Chair at the EUI, to reflect on the potential lessons from the crisis. A recording of the webinar is available here.
Corsetti, G, G Hale and B Weder di Mauro (2023), The Making of the European Monetary Union: 30 years since the ERM crisis, CEPR Press.