The Euro was created in 1999 by the European Commission and European Central Bank. The latter preceded its creation by a year. The goal was to reduce the transaction cost of European trade, by extension, the world’s trade with Europe. Indeed, Chancellor Helmut Kohl of Germany and President Francois Mitterand of Franceplayed a large role in fostering the creation of a Euro or European Economic Community; as underlined by the Maastricht Treaty in 1992. Invariably, one cannot also discount the influence of Jacques Delors, who headed the European Commission in 1989. All wanted a single Europe and a single currency.
With a single currency, trade and services could flow across borders easily; not unlike what was expected of the Schengen Agreement. The 28-member bloc would then form a better, if not a more perfect, economic union. At least that was the goal and theory. Between 1999-2007, it seems to have worked well, though. There was no global financial turbulence in the form of sub-prime crisis or any major financial upheavals to upend the whole European process. Thus, Euro could become the anchor currency that allowed the rest of Europe to borrow, spend, and grow.
But a common currency also denotes the need to give it a fixed value across the entire span of European member states at an interest rate resonates with the local economic conditions. But, with the exception of the European Central Bank, there aren’t any major institutions in Europe that can be the lender of first or last resort when countries aree in financial dire straits. As opposed to America, which spends 20 percent of its federal funding, European Union merely spent 1 percent. Such low outlay of funds and development aid could not spread the benefits of European Union quickly, thus causing a populist and rightist revolt.
More importantly, as the world headed into the Great Recession in 2008, the Euro, controlled by the European Central Bank, pumped money into its system. But countries that had weak banking systems like Portugal, Italy, Greece and Spain, all faced increasing problems of what Joseph Stiglitz called “divergence.”
But the European Central Bank, unlike the Federal Reserve (Feds) of the United States, was also glued to the idea of inflation targeting. Whereas the Feds tried to promote employment, growth and price stability, European Central Bank was fixated on holding the inflation target stable; often lower than 2 percent. Thus, starting in 2010 theEuropean Central Bank reduced the amount of Euro available in the system, even when there was a great need for it.
As a result, over the last six years, Europe has stagnated. It has also become increasingly divided. Instead of strengthening all the economies, the Euro precipitated a situation where there are European areas are now stagnant and burdened by zero or no growth and high graduate unemployment.