Will the euro survive as a currency long term?
The euro will survive long term for two reasons.
First, even though it currently does not create economic convergence among its member states, as it was set out to do, divorce is very hard – almost impossible – especially for banks and financial markets. Even French and Italian populists have backed away from the idea of a euro exit, in part because the population still largely supports membership, and will do so even more the older they get.
Second, Eurozone politicians have, with the help of the European Central Bank (ECB), showed a remarkable ability to muddle through, in part because so much political capital has been invested in the project. The institutions put in place since 2010 – such as the European Stability Mechanism bailout fund, the banking union with its new regulations on bank resolution, and, crucially, the ECB’s Outright Monetary Transactions programme to arrest bond market panics – allow such a political approach to continue.
That the euro’s economic faults are corrosive for the European project as a whole is a different matter.
The political imperatives behind the euro make its survival probable, but without major policy changes to address current account problems with the effective abandonment of the fiscal compact and its austerity agenda it will be an unhappy experience for many people.
The formation of the euro paid no attention to current account positions of the prospective member countries – and current account imbalances were substantial and tended to widen in the first decade of the euro. The financial crisis highlighted the unsustainable borrowing patterns coming from the current account imbalances.
Current account deficits have been drastically reduced since the financial crisis but only at the expense of deflation and recession. There appears no way from many euro countries to achieve high employment and sustainable current account positions.
The “one size fits all” approach to fiscal policy requires all member countries to strive for budgets in balance or surplus, no matter what their requirement for public investment and no matter what the economic circumstances.