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Slovakia has been part of the eurozone for 16 years: Was adopting the euro a political project?

15. 1. 2025 | 448 visits

On January 1, 2025, the Slovak Republic entered the 16th year of using the single European currency – the euro (2009). What was the significance of adopting the euro, what were the plans and what was achieved? What advantages does Slovakia have as a member of the eurozone?

From a monetary history perspective, the introduction of the euro currency is undoubtedly one of the most important milestones of the contemporary world economic order, which subsequently led to the end of globally competing currencies such as the German mark, the French franc, the Spanish peso and the Italian lira, to name but a few. Beyond national pride, having a domestic currency provides seigniorage and serves as an effective macroeconomic policy tool in regulating and maneuvering with international trade and investment imbalances.

The legitimate question that follows is why would a country that owns an internationally influential currency in trade and investment prefer to abandon its currency and join a common currency? The natural argument is that the creation of the EU in general and the monetary union in particular could be seen as a response to the changing global economic landscape, such as regionalization and globalization tendencies. Therefore, the creation of a common currency was believed to elevate the bargaining power of the EU and EA member states on the global stage. Thus far, the introduction of the euro as a common currency is essentially the final stage in the decades-long effort to unite the European continent after the tragic Second World War.

 What does the euro mean to the Europeans?

There is a growing argument that the euro currency is largely a political rather than an economic project. The role of Euro adoption to European peace and stability can be observed from various descriptions of the Euro. For instance, the EC describes the euro as a “symbol of EU integration and identity. Today, more than 340 million people use it across 19 EU countries, with 27.6 billion euro banknotes in circulation for a value of about €1.5 trillion. The euro is currently the second most widely used currency in the world behind the US dollar” (EC, 2022). Ursula von der Leyen, President of the European Commission, describes Euro as follows: “It is now twenty years that we, European people, can carry Europe in our pockets. The euro is not just one of the most powerful currencies in the world. It is, first and foremost, a symbol of European unity. …. We can all be proud of that.” David Sassoli, the former President of the European Parliament, described the Euro as “as the embodiment of an ambitious political project to promote peace and integration within the European Union. The euro is a symbol, the coming to fruition of a historic political vision, an ancient vision of a united continent with a single currency for a single market.” Charles Michel, President of the European Council, said: “The euro has come a long way — it's a true European achievement. I would even say the euro has become part of who we are. And how we see ourselves as Europeans. Part of our mindset. And part of our European spirit.” Christine Lagarde, President of the European Central Bank, stated, that “the euros we hold in our hands have become a beacon of stability and solidity around the world”. This opinion is shared by the vast majority of the population in the EA countries. According to the 2023 Flash Barometers Survey, “79% of respondents living in the euro area believe that having the euro is a good thing for the EU and 69% believe it is a good thing for their own country”.

Internationally, the Euro global influence can also be observed from its growing impact outside of the EA countries, where 60 countries outside of the EA use Euro directly or indirectly, which amounts to roughly 175 million people. The emerging optimism gives strong reason to believe that the euro has the potential to remain a dominant international currency, competing fiercely with the US dollar and providing both liquidity and risk diversification to the global economy.

Euro adoption: a bumpy road, not a path through a rose garden

The euro project is more than the introduction of a single currency. The euro has become both the cause and the consequence of European economic cooperation and integration. It is a cause, because the introduction of the single currency has raised the level of European cooperation and integration to its highest level in history. It is a consequence because European integration did not begin with the introduction of the Euro. Rather, the European integration process is a reaction to the devastating Second World War and the subsequent relentless search for a mechanism to avoid a repetition of the same conflicts with a tragic end. Winston Churchill's (1946) Zurich speech calling for the re-creation of the “European family” echoed for years. The euro project is thus the result of the tireless efforts of several visionary individuals to achieve this goal. This included the creation of a structure of cooperation that would allow Europeans to live in peace, security and freedom. The assumption, which largely proved true in the following decades, was that economic cooperation and integration would help (directly or indirectly) to minimize the causes of potential regional conflicts in Europe.

As one of the early achievements of the economic integration process, the European Coal and Steel Community was established in 1952, followed by the European Economic Community with the Treaty of Rome in 1957. Despite initial pessimism, the Single European Act was adopted in 1986, followed by the Single Market Program in 1992 and a completed Single Market today. The integration process culminated in the adoption of the Euro as a common currency, which is thus far considered the highest level of European economic integration. While full economic integration would require a fiscal union, this is unlikely to be achieved in the coming decades due to fierce opposition from politicians and the general public in EU member states. This will make the EU and EA project an incomplete union. The optimal solution seems to be to calibrate around the status quo, as aggressively pushing for a fiscal union could be counterproductive.

The Euro adoption: a bumpy road to a fabulous destination

Given the lack of historical experience, the introduction of the euro was preceded by fierce and at times turbulent debates both between and within countries and was surrounded by many challenges. There was a wave of pessimism about whether a monetary union adopted by economies with heterogeneous economic structures could guarantee the sustainability of a common currency. Pessimism and skepticism dominated the soon-to-be European currency, which was described as a “currency without a state”. The dominant obstacle was the fact that national currencies and independent monetary policies were at stake. The crisis of the European Monetary System (EMS) in 1992-3 and the subsequent departure of the United Kingdom added fuel to the fire and did not help the adoption process. It would also be a common currency of states with significant asymmetries in levels of economic development and ideological backgrounds. The more countries that adopt the euro, the higher the level of uncertainty.

In line with the theory of the Optimal Currency Area (OCA), introduced by Robert Mundell, the so-called Maastricht Treaty was adopted in 1992, followed by the Stability Growth and Pact (SGP) that was adopted in 1997. This justified the creation of the European central Bank (ECB) in 1998 to be in charge of policy surveillance and coordination. While the mechanisms are effective in principle, the criteria and the institutions couldn’t prevent subsequent crises as witnessed in subsequent years.

Crises, times of temptation and policy responses

As discussed in detail by the ECB (2022), three major crises have defined and challenged the existence of the euro currency. The financial turmoil that started in 2007 and the ensuing global financial crisis of 2008-09, and the euro area sovereign debt crisis of 2010-12, and the most recent crisis related to COVID-19, which started in early 2020. Brexit could not have come at a worse time. The common denominator of these crises was sluggish economic growth, higher unemployment, internal and external imbalances, in particular alarmingly rising public debt, with multifaced ramifications for monetary and fiscal policy responses. In particular, the European sovereign debt crisis of 2012-2013, with countries such as Portugal, Spain, Greece, Italy and Ireland facing significant public debt sustainability problems, was a major challenge for the fundamental existence of the euro as a common currency. These call for more stringent policies and reforms, leading to higher political temperature, blame shifting and growing resentment as to whether some countries should have been members of the common currency member.

 This was undoubtedly also the time of temptation for the ECB, which was scrambling to both defend the euro and provide additional liquidity to the economy in an effort to avoid a potentially protracted economic crisis. In the aftermath of the European sovereign debt crisis, the euro had lost momentum and there were discussions, albeit sporadic, about whether or not the euro would survive. Then President of the ECB, Mario Draghi’s so-called “whatever it takes” speech, on July 26, 2012, only confirms the existential threat to the Euro during these gloomy periods. The subsequent introduction of unconventional monetary policy as well as negative interest rate policy signaled the temporary shift from the ECB's original purpose of being an independent and single-purpose bank (targeting price stability) to a multi-purpose central bank doing “a little bit of everything”. Understandably, extraordinary times require extraordinary solutions. Nevertheless, the ECB remains a highly credible central bank with full responsibility for the monetary policy of the euro area member states.

Reforms, Surveillance, and Sanctions

In times of economic crisis, there is a lot of learning by doing and accumulating experience in dealing with financial and economic crises. In the EA and EU context, each crisis has left its “fingerprint” on new monetary and fiscal policies. While most policies have helped to mitigate the severity of the crisis at some point, there is also a recurrence of the crisis, which raises a number of open questions that need to be addressed. For example, how long can the euro project be sustained within the current framework of monetary union but with fiscal decentralization? Would stricter fiscal rules resolve the conflict? Are EU member states that haven't yet adopted the euro better off with their autonomous monetary policies? If so, would this justify abandoning the euro or postponing its adoption? Is it possible for such economies to make effective use of autonomous monetary policy in a highly integrated global economic landscape?

 As Mark Twain said, “The secret to getting ahead is to get started”. The road ahead may be bumpy again, but the incentive to keep going to a fabulous destination acts as a steam engine, and the euro as a common currency is certainly a fabulous project that has brought more stability and cooperation and less friction to Europe. Yes, in such a rapidly changing global economic landscape driven by innovation, there will always be competing ideas and periods of fear and uncertainty, but with determination and courage, the euro has a bright future. As Franklin D. Roosevelt put it nicely, “Courage is not the absence of fear but rather the assessment that something else is more important than fear”.

 

Text: Menbere Workie Tiruneh 

https://ekonom.sav.sk/sk/publikacie/-p452

Foto: canva.com

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