25 Years Later: What The Euro Has Become

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Twenty-five years ago, on December 15, 1995, the fifteen heads of state and government of the then EU decided at a council meeting in Madrid to name the future common currency the "euro" and to introduce it from January 1, 1999, initially as a book currency at a fixed exchange rate. The actual introduction of cash took place in 2002. Denmark, Great Britain, and Sweden, however, retained their national currencies—and still do today.

Poland, the Czech Republic, and Hungary, which joined in 2004, also stubbornly resisted giving up the złoty, koruna, and forint for the euro. From the beginning, there were two competing views on what kind of fiat currency the European Central Bank's (ECB) money should be.1 The euro was sold to a skeptical German public as the successor to the Deutsche mark. The common currency was not to be used to directly finance government budgets. Many Germans feared that they would have to pay for the high debts of the southern countries.

Thus, the ECB was contractually prohibited from acquiring government debt directly, although it did accept debt as collateral for bank loans from the outset. In addition, the Maastricht Treaty, signed in 1992, provided in the no-bailout clause (article 125 of the Treaty on the Functioning of the European Union [TFEU]) that euro states were not liable for the debts of other member states. Theo Waigel (Christian Social Union [CSU]), the German finance minister at the time, promised that the euro would be as strong as the mark.

Today, we are a long way from a "German" euro, as the opposite view of the euro's role has steadily gained ground. This French-Italian, or Mediterranean, view sees monetary policy as an instrument for making fiscal policy dreams come true. The central bank is subordinate to the Ministry of Finance. Such divergent convictions were bound to lead to tensions and conflicts. Indeed, while a gold standard fosters international collaboration and peace, the fiat common currency has been a continuous source of conflicts. The resulting compromises have successively made the euro more "Mediterranean."

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Philipp Bagus is professor at Universidad Rey Juan Carlos. For a detailed history of the euro see his book The Tragedy of the Euro.

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