Assessing the impact of the euro

TheGameTV
5 min readDec 2, 2023

I would like to discuss with you the euro and the reason I think it was a great error to establish it as a unified European currency.

The European Union (EU) originated from efforts to promote economic cooperation and prevent future conflicts in Europe after the devastation of World War II. The precursor to the EU was the European Coal and Steel Community (ECSC), established in 1951 by the Treaty of Paris. This innovative agreement aimed to integrate the coal and steel industries of six founding countries: Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. The ECSC marked the first step towards economic integration and laid the foundation for a more comprehensive European collaboration.

The idea of a unified European currency, the euro, took shape later as a natural progression of the integration process. The Maastricht Treaty, signed in 1992, set the stage for the creation of the European Union and outlined the framework for the Economic and Monetary Union (EMU). The EMU was designed to establish a single currency, the euro, and a common monetary policy among participating EU member states. The euro was officially introduced in electronic form for banking and financial transactions on January 1, 1999, and euro banknotes and coins entered into circulation on January 1, 2002. The adoption of the euro aimed to enhance economic stability, facilitate cross-border trade, and further bind European nations together through a common currency. The introduction of the euro marked a significant milestone in the ongoing process of European integration.

As many economists know, there is a key concept in macroeconomics. The theory posits that a currency area, such as the European Monetary Union (EMU) with the euro, would function better if member states shared similar economic characteristics or could adopt common economic policies.

The idea is that an optimal currency area should have:

1. Labor Mobility: The ability of people to move freely within the area to find employment.

2. Flexibility of Prices and Wages: The ability to adjust prices and wages in response to economic shocks, without the lever of national monetary policy.

3. Economic Integration: A strong interconnection of economies, so that economic shocks in one country are more similar to shocks in other countries within the area.

The theory of Optimal Currency Area (OCA) was primarily developed by the economist Robert Mundell. Mundell, a Canadian economist, formulated and published his ideas on OCA in the 1960s. He was awarded the Nobel Prize in Economics in 1999 for his pioneering work in this field and other contributions to the theory of currency areas.

Therefore, if we analyze Europe, we could say that EMU cannot be considered an optimal currency area. There are many problems:

1. Most European countries have too many differences to be considered parts of an optimal currency area. They have different languages, different cultural and historical backgrounds, different interests in consumption, etc.

2. Establishing a unified European currency has led to many issues: loss of monetary policy autonomy (nations no longer can set interest rates or control their money supply independently. Let’s think about the appreciation and depreciation of currency. Maybe for Italy it would be best to depreciate it so that exportations can be improved. Did you know the “Japanese yen depreciation policy”? During the post-World War II era and particularly in the 1950s and 1960s, Japan pursued an export-oriented growth strategy. To make its exports more competitive in international markets, Japanese authorities occasionally engaged in interventions in the foreign exchange market to weaken the yen. A weaker yen makes Japanese exports more affordable for foreign buyers.). Limited fiscal policy autonomy (While countries maintain control over their fiscal policies, the constraints of the Stability and Growth Pact limit the extent to which they can use fiscal policy to stimulate their economies. The pact imposes rules on budget deficits and public debt, aiming to maintain stability within the Eurozone). Divergent economic conditions (Economic conditions and structures vary widely among Eurozone member countries. A one-size-fits-all monetary policy may not be suitable for all, as countries experience different levels of inflation, unemployment, and economic growth. This lack of flexibility can lead to economic challenges for certain countries). Sovereignty Concerns (the adoption of a common currency involves a significant loss of economic sovereignty. Countries give up control over their currency, a crucial aspect of national economic management). Asymmetric shocks (The Eurozone countries are exposed to asymmetric economic shocks, where one country may be significantly affected while others are not. In the absence of independent monetary policies, affected countries may find it challenging to recover from such shocks). Political challenges (The implementation of a common currency requires a high degree of political coordination and cooperation. Divergent political interests among member states can complicate decision-making processes, particularly during economic crises). Banking sector challenges (The integration of banking systems can pose challenges, as demonstrated during the Eurozone debt crisis. Banking sectors in some countries faced significant stress, and the lack of a unified approach to banking supervision and resolution complicated the resolution of these issues).

Moreover, the concerns surrounding the Eurozone’s functionality as an optimal currency area are substantiated by the research of David G. Mayes. Mayes emphasizes the clear asymmetries in the relationship between demand pressure, inflation, and employment within the European Union (EU) and the euro area. His research underscores the challenges posed by asymmetry at sectoral and regional levels, making the use of arithmetic weights for determining area-wide monetary policy potentially erroneous. Mayes contends that significant variation in responses across EU countries exists, and relying on average values could lead to misleading policy conclusions.

Mayes particularly focuses on asymmetries stemming from the behavior of the labor market, where rapid downturns in the economy have disproportionate effects on unemployment due to sectoral and regional mismatches. These asymmetries have implications for the inflationary process, with big differences between sectors and regions distorting the overall picture. The research suggests that ignoring these disaggregated problems may result in misleading policy conclusions.[i]

[i] Monetary policy problems for currency unions: asymmetry and the problem of aggregation in the euro area by David G. Mayes

COPYRIGHT Andrea Pimpini

I’m Andrea Pimpini, a student of Economics and Management at the University of Chieti-Pescara. I am also an Erasmus+ student at the University of Split (Faculty of Economics, Business, and Tourism) and at the University of Macau (Faculty of Business Administration). I have had the privilege of participating in the prestigious INGENIUM Project, which aims to create a European University by fostering collaboration among universities across Europe.

I founded the Italian magazine thegametv.it, where I write news, reviews, and curiosities related to gaming. Over the years, the magazine has gained increasing attention and engagement, leading to collaborations with Xiaomi IT and Xbox Game Studios. Thanks to my experiences i have also embarked on a freelance career in digital marketing on Fiverr, receiving consistently positive 5-star reviews from clients. One of my significant hobbies is music, and thanks to my studies and web experiences, I handle various aspects independently, including print and radio promotion, as well as digital marketing.

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