Tuesday 1 January 2019 8:01 am

Euro at 20: Time for 'close and candid introspection' rather than celebration

The 20th anniversary of the euro should not be cause for celebration but for “close and candid” introspection.

European Central Bank president Mario Draghi admitted he was a biased observer when proclaiming the euro had been a success ahead of its 20th birthday yesterday.

But he stopped short of celebrating and said the anniversary was cause for a “close and candid introspection that could inspire future action on how to complete the monetary union.”

He said the benefits of the single currency had not been felt equally among the 19 euro area countries and said work to complete the monetary union and bring closer integration was more important than ever.

While it wasn’t distributed in physical form until 2002, the euro was launched and began trading on 1 January 1999.

The national currencies of the eurozone countries were locked at fixed rates against each other and the euro was formed.

Two decades later and the eurozone has expanded to 19 countries with a further seven obliged to join on meeting certain criteria.

Denmark and the UK are the only two member states to refuse to join the euro.

Draghi said the euro had existed during two markedly different decades – the first, he said, was the “culmination of a 30-year upswing in the global financial cycle”, while the second he branded “the worst economic and financial crisis since the 1930s.”

The euro’s second decade has been characterised by the eurozone debt crisis, in which Greece was bailed out three times to the tune of €289bn and Ireland was also rescued.

The mounting debt crisis threatened to collapse the eurozone completely.

Having emerged out from the other side of the crisis, International Monetary Fund (IMF) managing director Christine Lagarde said the currency was ready to move forward.

Lagarde said: “At age 20 the euro area is more mature – battle scarred yes, but also stronger and ready to move forward.”

But Lagarde highlighted three keys areas to improve the euro area’s resilience and secure its future; the completion of the banking union, “truly integrated” financial and capital markets and greater fiscal risk-sharing.

She said: “To be truly effective, the euro area cannot just be a union of convenience in calm waters. It needs to be a strong shield amidst storms.”

She said: “During the last crisis, there was an overreliance on monetary policy. Simply put, the euro area should not repeat the mistakes of the past.

“Greater risk-sharing combined with larger national buffers would allow countries to avoid having to raise taxes and cut spending when the next downturn comes.”

Berenberg senior economist Kallum Pickering said the ECB did not have the “tools” to manage the last crisis and only another crisis would prove whether that had changed.

When it comes to the currency’s popularity within the EU, it has never been higher.

The Commission’s most recent survey revealed that 64 per cent of eurozone citizens felt the currency was good for their country – the highest level since surveys began in 2002.

The euro was the third most popular aspect of the EU when citizens were surveyed for the 40th birthday of the European Union in 2013.

Free movement and peace among member states topped the poll but 31 per cent of citizens described the euro as a success.

Testament to the resilience of the currency, Investec Economics predicts that the euro will mark its birthday at $1.17, close to the $1.1747 it launched at 20 years ago.

The euro began trading on 31 December 1998, as a non-physical currency, at $1.168 and after its first day rose to $1.18.

Over the years the currency has hit highs of $1.60 before the financial crisis in 2008 and lows of $0.83 in 2000 at the end of a tough first year in existence.

Testament to the resilience of the currency, Investec Economics has predicted the euro will mark its 20th birthday close to that $1.18 mark.