The start of 2012 marks the second time the euro has reached its 10th birthday. From a technical and financial point of view, the single currency was launched on 1 January 1999, when all financial claims in the currencies of the first eleven member states were converted into euros. Three years later this unification became "visible" to European citizens as euro notes and coin replaced those of the member states.
In the runup to the first 10-year anniversary, Jean-Claude Trichet, then president of the European Central Bank (ECB) claimed that the euro had "helped to protect the euro area economy from the many global shocks and considerable turbulence of the last few years". The mood at the second anniversary could hardly be more different. Unresolved crises in the eurozone, and its very problematic future, have become the most serious source of shocks and turbulence in the global economy.
Trichet claimed at the same time that monetary union had been good for employment: "Between the launch of the euro and the end of 2007, the euro area created more than 15 million new jobs and the unemployment rate was at its lowest level since the early 1980s." In fact the European commission's Ameco database now gives the growth of employment in the original eurozone (the first eleven countries plus Greece) between 1999 and 2007 as 13.7 million. But, of this total, two thirds, or 8.9 million, took place in the "periphery" – in Ireland, Greece, Spain, Italy and Portugal.
In other words, the growth of employment was not due to the good functioning of the monetary union but to its malfunctions. It depended on widening trade imbalances – huge surpluses in Germany and some of its neighbours against widening deficits in the periphery, covered by unsustainable capital flows from the former to the latter. Even so the employment performance of the eurozone was not such an impressive achievement. What Trichet called the lowest level of unemployment "since the early 1980s" was still, in 2007, before the global crisis pushed it back up, 7.6%. In the three countries which chose not to adopt the euro, Denmark, Sweden and the UK it stood at 3.8%, 6.1% and 6.6% respectively.
In fact the first decade of the euro followed two decades of restrictive macroeconomic policies – aimed, in the 80s, at bringing down inflation via high interest rates and, in the 90s, to prepare for monetary union by increasing taxes and cutting public expenditure. Candidate members for monetary union sacrificed development and employment to come into compliance with the Maastricht conditions, later perpetuated as the stability and growth pact.
Whether the eurozone can survive the crisis will not be discussed in detail here. However, if the monetary union does survive, in the form now planned by EU leaders, then the cure could turn out to be worse than the disease. What is now termed "fiscal union" is nothing of the kind; it does not involve a genuine co-ordination of macroeconomic policies or significant transfers of tax revenues. Rather it is an authoritarian structure that would subject the weaker states to permanent and extremely intrusive surveillance, formally by the commission and the ECB, in reality by Germany and the stronger northern European states.
The "surveillance union" is likely to be as dysfunctional in economic terms as it is politically undemocratic. One alarming aspect of German views of the current "reforms" is a fascination with numerical limits – on public spending, on public borrowing and so on. In many ways these are analogous to the Friedmanite notion of numerical limits on the money stock and, just like money supply rules, they will prove to be either ineffective or dysfunctional. Public debt is not a control variable available to policymakers; it represents a relationship between the public sector and the unstable, unpredictable, private sector which does not admit of mechanical arithmetic constraints.
Space is lacking for a discussion of alternatives (for a comprehensive critique of EU policies with detailed alternative proposals see the 2012 Euromemorandum). However, three basic elements can be mentioned: massive debt forgiveness, financed by a wealth tax on the huge private fortunes accumulated during the boom; substantial transfers from stronger to weaker economies in the EU; and a genuine co-ordination of macroeconomic policies, whose first objective must be to put an end to the German mercantilism that is the source of many of the current problems. A few years ago, Germany cut social security contributions, financing this move with an increase in VAT – this was equivalent to a devaluation in a country with a trade surplus second only to that of China. Reversing that deeply irresponsible measure would be one sign of returning sanity in the monetary union.