Eighteen years have passed from the formal birth of the “single currency” and fourteen from its physical introduction into what has been called the Eurozone eversince.
This period has been long enough to allow us to analyze and “draw conclusions” with regard to the originary event of European integration and dwell on the positive and on the evident critical aspects, which have prompted the emergence of several critical movements – perhaps even openly hostile – to keeping the monetary union alive.
Let us remember, first of all, what were the necessary preconditions for a State to be able to access the single currency, established with the Maastricht Treaty a few years earlier: a deficit at or below 3% on gross domestic product; a public debt / GDP ratio below 60%; an inflation rate not exceeding by more than 1.5 percentage points compared to the average of the three member states with the lowest inflation; long-term interest rates that do not exceed by more than 2 percentage points below the average of the three member states with the lowest inflation; at least 2 years of belonging to the European Monetary System.
It is evident that at the time – but also today – Italy did not comply with some of these parameters, especially with those related to the previous public debt, but during the process of unification in the ’90s, were also allowed those Member States whose misaligned parameters with the provisions had shown an alignment trend in the medium term. That is how Italy and Belgium were able to become among the first countries which adopted the new “currency”.
Already during its startup phase, the euro project received several criticisms, the most authoritative of which was definitely Milton Friedman’s. In 1997 the Nobel Prize for Economics published a study, The Euro: Monetary Unity to Political Disunity, in which he analyzed the critical issues inherent in what still seemed to be merely a project – although advanced – of a group of political leaders, economists, and central bankers.
“The impetus for the Eurozone comes from politics, not from economics. […] I believe that adopting the euro will have the opposite effect. It will exacerbate political tension transforming divergent shocks, which might have been avoided through exchange rate adjustment in political problems regarding division.” Moreover “political unity may pave the way for monetary unity. Currency unity set under unfavorable conditions will prove a barrier to achieving political unity.”
These words contain the paradox generated by the adoption of the single currency that should have been the final result of a process of political aggregation, but seems to become the cause of ongoing divisions between the EU member states.
Friedman’s idea is actually very simple: a common currency is a great economic instrument in certain conditions, but it may also prove to be inadequate, even counterproductive, in other situations. It depends on the harmonization mechanisms that exist between the states that adopt it. The first situation, the positive one, can be seen in the United States. The second one can be seen in the then European Community, currently called EU.
The US, in fact, adopt many offsetting factors, as Friedman writes, “Americans speak the same language, they see the same movies and can move freely from one country to another, wages and prices are moderately flexible and the federal government spends about twice as much as the national governments”. Tax differences between Member States, which do exist, are however included in a harmonious and structured system on the federal level that allows a virtuous tax competition, on the level of the rates, facilitated by the comparison of the fairly easy withdrawal from the plant level as formal common in all European Union countries. Economic shocks are thus compensated by the “movement of people and capital, liquidity transfers from the central government to the states and by the flexibility of prices and wages.”
Europe, on the contrary, both twenty years ago and today does not show any of these conditions: although the capitals have a “privileged way” for internal movement of goods and service, we cannot see the opposite, the differences in labor market regulations and business relations were and are still high, and the European Commission – then and now – spend a tiny fraction of the Eurozone governments’ budget, not representing a real federal government but only a supranational body with limited powers and reserved by the Treaties.
That is how the Eurozone was born. Maimed, since it does not refer to a homogeneous market but to a number of states whose civil codes, tax systems, and internal government structures are very different.