6. A Critical Assessment of the Euro Project in Retrospect

The Single Supervisory Mechanism (SSM) was implemented in an effort to avoid fragmentation among the euro area member states. Under the SSM, the ECB assumes direct supervision of the larger banks, while national authorities collaborate with the ECB to oversee the smaller banks. Additionally, channelling funds from the European Stability Mechanism (ESM) solely as a safeguard for the Single Resolution Mechanism (SRM) would shift the emphasis toward stabilizing banks rather than stabilizing the governments they are indebted to (Gern et al., 2019, p. 18).

This involved implementing additional interest rate reductions (initiated in 2012, ultimately reaching 0% interest rates in 2016) and an unprecedented provision of liquidity, particularly through large-scale asset purchases commencing in 2015. As a result, the monetary base has expanded by 250%, and Target2 imbalances have reached unprecedented levels. The substantial acquisition of government debt has raised concerns regarding whether the Eurosystem is exceeding its mandate by effectively engaging in monetary financing of sovereigns. It has also prompted questions about the potential adverse effects of accommodating financing conditions for governments on the necessary reforms. While the ECB has stated that its highly accommodative monetary policy aims primarily to bring inflation rates closer to the target, it has consistently emphasized that monetary policy cannot substitute for structural reforms and fiscal consolidation, but rather offers a temporary respite to facilitate these processes. Nevertheless, the availability of low-cost financing for governments not only eased the implementation of reform programs but also tended to reduce the immediate cost of delaying reforms. Consequently, as Whelan (2019) remarks, there is a risk that efforts toward fiscal consolidation and structural reforms may weaken (Whelan, 2019, p. 19).

In addition to the EFSF, the European Financial Stabilization Mechanism (EFSM) was also introduced in 2010, with a volume of €60 billion. The EFSM served as an emergency funding program managed by the European Commission, utilizing funds from the EU budget. Although smaller in scale compared to the EFSF, it played a role in providing financial support during the crisis.

In order to decrease the likelihood of fiscal crises, the Stability and Growth Pact underwent reforms in 2012, resulting in the creation of the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union. This treaty combines enhanced supervision and coordination of economic policies, as well as stricter deficit regulations (Fiscal Compact), applicable to all Eurozone member states. It is worth noting that Bulgaria, Denmark, and Romania have also chosen to participate in these measures.

The popularity of the euro among citizens is the primary factor that has contributed to its continued existence. Surprisingly, despite experiencing multiple crises over the past decade, support for the euro has steadily increased among individuals residing in the Eurozone, currently reaching 75%. This demonstrates that the euro project has proven to be far more resilient than initially anticipated. In fact, the common currency has weathered numerous challenges that would have been expected to lead to the departure of one or more countries. These challenges include prolonged economic downturns in certain member states, EU-IMF financial programs with strict conditions, the implementation of capital controls in Greece and Cyprus, and the loss of depositor funds in Cypriot banks. In each of these instances, exiting the euro was a viable option, yet governments made the difficult decision to endure these hardships, emphasizing the significance they place on maintaining their membership in the eurozone (Gern et al., 2019, p. 26).

Subsequently, the newly introduced currency, whether linked to the euro or left to fluctuate freely, would likely experience a significant devaluation compared to the euro. This considerable decrease in value could potentially result in a rise in inflation, which might be addressed through stringent monetary measures implemented by the country’s central bank. Consequently, this could lead to an economic downturn or recession within the departing economy.

After a country’s departure from the euro, significant legal complications would arise concerning contracts that involve payment obligations in euros. The government of the departing country might attempt to pass legislation stating that domestic contracts referencing euros should now be understood as referring to the new currency. However, such actions would likely face legal challenges in international courts. Prolonged and disruptive legal disputes would ensue, potentially lasting for years after the exit from the euro, resulting in ongoing harm to the economy. Additionally, the departing country’s position within the European Union could be called into question, adding further uncertainties and complications (Gern et al., 2019, p. 27).

For example, the fact that citizens of a country accepted a prolonged economic downturn in the past without considering leaving the euro does not guarantee that the euro will maintain its popularity if another extended period of economic hardship were to occur. This is especially true in countries where the constraints of euro membership could lead to the imposition of further austerity measures during the next recession. Each country may react differently to the possibility of sovereign default, particularly those with significant domestic holdings of sovereign debt. Additionally, while some argue that the ECB’s Outright Monetary Transactions (OMT) program could prevent a crisis in the euro area, the political dynamics and feasibility of implementing an OMT program in Italy, combined with a formal adjustment program from the ESM, remain uncertain (Gern et al., 2019, p. 27).

Regrettably, the initial period of the common currency demonstrated that the SGP was unlikely to be effective. In 2003, the European Commission determined that both Germany and France had breached the SGP and proposed that the ECOFIN imposes corrective measures on these countries through the excessive deficit procedure. However, the politicians serving on the ECOFIN committee chose not to adhere to the Commission’s recommendations. As a result, with the leading economies of the euro area unwilling to comply with the SGP’s terms, the Pact was violated almost as frequently as it was adhered to by member states in the subsequent years (Whelan, 2019).

In an interview at the French Le Monde, Prodi stated, “I know very well that the stability pact is stupid, like all decisions which are rigid. The pact is imperfect. We need a more intelligent tool and more flexibility” (see also Osborn, 2002).

Apart from the asset purchase programs implemented by the US Federal Reserve and the Bank of England, the ECB has also employed a negative deposit rate on reserves (for an extensive discussion, see Kokores, 2022, pp. 339–352). This rate, in combination with the significant increase in bank reserves resulting from the Eurosystem’s asset purchases, has likely played a significant role in reducing bond yields in the euro area in recent years. To examine how individual banks in the euro area are adjusting their balance sheets in response to negative rates and increased reserves, see, for example, Ryan and Whelan (2021). Additionally, the ECB has introduced a new tool called Outright Monetary Transactions (OMT) in 2012, following Mario Draghi’s statement to do “whatever it takes” to safeguard the euro. The announcement of the OMT instrument had a notable impact in countering negative market sentiment regarding peripheral sovereign bond yields during the peak of the euro crisis in 2012. However, the OMT instrument has not been utilized thus far, and there are still many uncertainties surrounding its practical implementation; as Demertzis (2020) eloquently remarks, “OMT was always meant to be the nuclear option; the kind of thing you put in place so that you do not have to use it” (para. 3). It had been predicted antecedent to the emergence of the COVID-19 pandemic (see, for example, Whelan (2019) that asserts that “given the low policy rates of recent years and the likelihood of another recession in the coming years, it is likely that the ECB will need to use all of its newly-developed tools (and perhaps some new ones) to fight any future severe recession but with these tools in place, it is possible the policy response to the next crisis will be quicker” (p. 21)).

Despite the clear negative economic consequences in the short and long term, the rhetoric surrounding “reclaiming sovereignty over our currency and budgets” could potentially gain traction among nationalist parties. These parties may draw inspiration from the strategies employed by proponents of Brexit, who effectively dismissed counterarguments as fear-based tactics employed by an elitist establishment (Offe, 2017). While opinion polls can provide insights into public sentiment at a specific moment, the Brexit process demonstrated that public opinions on economic matters can quickly become radicalized under certain circumstances. For example, recent surveys indicate surprisingly high levels of backing in the United Kingdom for an extremely rigid form of Brexit, aimed at enabling the country to pursue new trade agreements with non-EU nations. Prior to the Brexit referendum, there was limited evidence of support for such an approach, and from an economic perspective, it lacks a sound basis. However, within a relatively short timeframe, this viewpoint transitioned from being held by a small group of radical think tanks to becoming an official policy of the UK government. Similar arguments could be applied to UK migration policy, where concerns voiced by a minority of the electorate ultimately led to a significant shift and the adoption of government policies that have had adverse economic consequences (see, for example, Office for Budget Responsibility, 2021).

During the introduction of the euro, there was a sense of optimism among certain parties who believed that the efficiencies associated with the EMU would lead to an increase in economic growth. It was anticipated that the reduction of trade barriers would enhance intra-European trade and efficiency and the less affluent members of the euro area would benefit from external investments facilitated by deeper financial integration (Whelan, 2019, p. 19).