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Ideals versus reality

Frans Bieckmann is former executive director and editor in chief at The Broker
Evert-jan Quak is now Research Officer for the K4D Programme at the Institute of Development Studies.

The introduction of a single European currency was for many member states of the European Union a logical next step in a single market. With assumed improvements for trade, employment and wealth distribution, the euro was expected to bring all the different European economies closer together through the convergence of labour, fiscal, social and economic policies. Further political integration would be triggered and the ultimate ideal of unity and longstanding peace could be reached. But 15 years after the introduction of the euro, the reality is quite different. Instead of more, we see less solidarity among European member states. At the same time, there are rising trends in inequality, unemployment and low paid jobs – trends caused by the financial crisis, some might say, but such analysis overlooks several important details. In this long read we dive into those details and ask the question: what has the single currency brought us exactly?

About our living analysis on the eurocrisis

This article is part of our living analysis on ‘The rebirth of the Eurozone‘, which gives an insight into the current crisis in the Eurozone.

This first article looks at what has become of the ideals of the Eurozone through some reality checks.

The second article, ‘Debts and imbalances – The making of the euro crisis‘,  focuses on the economic analysis of sovereign debt and imbalances within the Eurozone.

The ideal of longstanding peace and political stability

About our living analysis on the eurocrisis

‘We could be sentimental now the Drachma has gone, with her 2,650 years the oldest currency of Europe,’ the former Prime Minister of Greece Costas Simitis said during the introductory celebrations of the euro in the early hours of 1 January 2002, ‘But for Greece this is an incredible historic moment: now we belong to the real Europeans’. The Dutch Prime Minister Wim Kok, who celebrated the introduction of the euro in Maastricht, the currency’s city of birth in 1992, emphasized that it would bring longstanding peace and political stability to Europe.

Video - The adoption of the Euro (multilingual)

If you read reports about the celebration of the euro at that time, you can see overwhelmingly the dream of European unity and peace. Former German Chancellor Helmut Kohl explains this optimism for the euro in an interview in 2002: ‘Nations with a single currency never went to war against each other. A single currency is more than the money you pay with. I wanted to bring the euro because to me it meant the irreversibility of European development… for me the euro was a synonym for Europe going further.’

Speech by German Chansellor Gerhard Schroder about the advantages of the Euro

A single currency was also meant to control Germany as the economic powerhouse of Europe – something that was essential according to European leaders, especially France, during the re-unification process of Germany in 1989–1990. The German magazine Der Spiegel cites the minutes of discussions it has seen between the former French president Francois Mitterand and the then German foreign minister Hans-Dietrich Genscher in the late 1980s and early 1990s as proof of a secret pact to dump the Mark as the price of re-making a single nation. ‘Germany can hope for the reunification only if it stands in a strong community’, the then French president said. ‘The current policies of the Federal Republic are putting a brake on the economic and monetary union.’

Read more - Power shift from France to Germany

The ideal of economic supremacy

Next to the ideals of peace and controlling German economic supremacy, many economic reasons were brought forward in favour of the single currency. Harvard University economist Jeffrey Frieden wrote back in 1998 (pdf): ‘Big corporations and banks believed that removing the uncertainties of currency fluctuations would help them realize the full promise of a single European market and give them a large effective home base from which to confront outside competitors.’

Background article

Why did countries enter the Eurozone? And what were the economic logics behind it?

Read the full background article here

And it was believed that this promise would benefit all countries within the Eurozone. Countries with traditionally high inflation, like Italy and Spain, would benefit from greater inflationary discipline due to the introduction of a common interest rate that the European Central Bank (ECB) would set for the whole Eurozone. The idea was that low inflation in these countries could be realized through adaptation to a stringent budgetary regime in combination with interest rates that are lower than their economies would require due to the ECB’s common interest rate policy. Low inflation means stable prices and wages, and, therefore, could benefit economic activities in all member states.

All Dutch consumers will benefit

It became a popular argument in most Northern European member states, also among trade unions and employer organizations: the single currency would increase trade, employment and living standards, while also equalizing prices and wages. The Dutch trade union CNV, for example, was openly optimistic about the introduction of the euro. ‘What will change with the Euro? The Guilder and Mark will be a bit less strong, and that is good for us,’ was their message in Dutch newspaper NRC Handelsblad, referring to the historic opportunity to improve Dutch and German competitiveness in Europe.

Trade union guidelines

The ideal of European political union

A single currency also means the handing over of power to the European Commission and other centralized European institutions like the European Central Bank. National budgetary rules for example were established within the Stability and Growth Pact, setting the threshold for the annual government budget deficit of member states at 3% of GDP. Countries gave up the power to revalue their national currencies, as well as their central banks’ influence over interest rates. In order to work effectively, a single currency ultimately means the conversion of economic, social, fiscal and labour policies between member states. In other words: a political union was necessary for the monetary union to effectively deliver stability, growth and employment.

About the Stability and Growth Pact

The reality is that national governments have never been keen to limit their sovereignty in favour of such a political union. The introduction of the euro could have changed that, but back in the 1990s national governments decided that the monetary union could go ahead without a political union. The idea was that a monetary union would progressively increase the convergence of member states’ economic, fiscal, social and employment policies after its establishment. There was no necessity for a real political union, therefore, according to the member states. An optimal currency area of converging policies and declining cultural and language barriers to improve the free flow of workers within the single market ‘[would] be increasingly fulfilled over time as citizens and governments learn to live with a common currency,’ wrote economists Richard Baldwin and Charles Wyplosz.1 Thus, the ideal of a political union became a vague and long-term commitment, while at the same time the euro had already became a reality. The result was that member states did not really attempt to grow closer to each other through converging policies.

A European political union: back on the agenda

Reality check – violating the rules

The political union never really came about. After the euro was introduced, the member states continued their own economic and fiscal policies. Since then, each of the initial 16 Eurozone countries has behaved as if it still managed its own currency. Each country went its own way when it came to lowering or raising taxes, borrowing money or cutting labour costs, almost as if it were expected not to take the other Eurozone countries into account. For example, Ireland continued to stimulate the relocation of the headquarters of multinational corporations to their shores due to low corporation taxes, without regard for the impact of its actions on other member states.

And while, for example, Spain’s workers saw their salaries increase thanks to cheap capital inflows and a construction boom, Germany stabilized its labour costs between 1996–2005 and even lowered them significantly in the years 2005–2008 as a result of implementing labour market reforms, deregulation and a low level of productivity growth. Germany was not alone, countries like the Netherlands, Austria, and Finland all encouraged wage growth moderation and flexible working conditions. In doing so, they started a race to the bottom to increase competitiveness through reforms in labour market policies and fiscal policies.

Background article

Since the 1990s a rapidly rising share of wealthy countries’ trade is with low-wage countries, and there is increasing evidence that this type of trade is disruptive to Western labour markets.

Read the ful background article here

But Greek economist Costas Lapavitsas points out: ‘Germany often accuses Greece – [Wolfgang] Schauble for instance does – that Greece has been living beyond its means. It’s true. But Germany has also been systematically living below its means, and this is how exports are generated, not because of technology, productivity and all that. That’s why it is so successful.’ And there is truth in his vision. In a monetary union, almost every economic decision has consequences for the partner countries. When labour costs fall in Germany, business owners and workers are directly affected in even the most remote corners of Portugal and Ireland due to increased competitiveness and without the compensation mechanism of exchange rates. In other words, in a monetary union it cannot be a bad thing to live above your means and a good thing to live below. The real rule must be to live by your means, explains Lapavitsas: ‘So Germany has not kept [to] the rules and the price is paid by the German people [in low wages and job insecurity].’

Read more - Support for Lapavitsas

Striking as well was that European governments violated the union’s self-imposed rules about solid budget practices right from the start: it was not just Greece and Portugal, but Germany and France that were among the first countries to violate these rules. The offenders seemed to believe that things would work out in the end, and that others would foot the bill. From 2003–2005 the German and French governments’ budget deficit exceeded 3% of their GDP.

Graphs - German and French budget deficit

The European Commission – then led by the former Italian Prime Minister Romano Prodi – had the power to fine these countries. But the finance ministers of what was then the 15 Eurozone member states gathered in Brussels and voted the Commission down. They voted not to enforce the rules they had signed-up to, which were designed to protect the stability of the single currency, and to let France and Germany off, the two most powerful nations within the Eurozone. In an interview with the BBC Romano Prodi remarked later: ‘Clearly, I had not enough power. I tried and they [the finance ministers of the Eurozone countries] told me to shut up.’

Instead of being fined, France and Germany were given more time to bring their budget deficits under control. The two countries were told to end their excessive budget deficits by 2005 at the latest. Paris believed that the EU’s financial rules did not take into account periods of low growth and should be more flexible to allow countries to use a budget deficit to increase GDP growth and their budgets. Berlin believed that it needed more time to realize its labour market reforms. They both emphasized that the threshold is arbitrary and some expenses at moments of low economic growth could help economies to recover and give them political space to implement difficult reforms.

Background article

How did neglecting the Eurozone budget rules help countries politically and economically?

Read the full background article here

However, the Commission said that France had not made any effort to comply with the Stability and Growth Pact – and German efforts to do so had been ‘inadequate’. The Commission stated in 2003: ‘Only a rule-based system can guarantee that commitments are enforced and that all member states are treated equally.’ Ironically, now Germany is among the countries that propose to implement such enforcements on all its member states, while the overspending at the start of the 2000s helped Germany to get through a painful transition.

Reality check – accelerator of mistrust and anti-solidarity

The French idea that the German economic powerhouse could be controlled within a monetary union has failed. On the contrary, the euro was the springboard that enabled Germany to amass more economic power as it developed into the main creditor for other Eurozone countries. It now is the most powerful member state and is not working together with France to solve the problems in other member states, but with the European Central Bank based in Frankfurt and the International Monetary Fund.

What happened was that Northern European countries (e.g. Germany, Finland, the Netherlands) could increase their export-led economies based on moderate wages, flexible labour markets and an undervalued euro. As the second article in this series will explain in more details, the trade surplus in these countries triggered cheap capital inflows into Southern European economies. In the years before the economic and financial crisis started in 2008, this was not seen as much of a problem by both sides. First, the creditors, the European bankers who were lobbying in favour of the introduction of the euro, were pleased. They welcomed new ways to make money on loans. To quote economic commentator Steve Randy Waldman from his blog Interfluidity: ‘The European financial system was architected to make lending to Greece — and Spain and Portugal and Italy — a money machine for bankers with little career risk over a medium term.’

European bankers could earn money with risky loans to weaker Eurozone countries, as the European banking regulations attached zero risk weight to all the public debt held by individual Eurozone member states, rendering it nearly costless for banks to simply manufacture deposits to purchase the public debt (also called sovereign debt) of Southern European countries. Eurozone sovereign debt was default-risk-free as a regulatory matter and currency-risk-free from the perspective of Eurozone banks. As such, the euro opened up a capital flow within the Eurozone benefitting the financial sector.

What does default risk-free mean?

The debtors on the receiving end of the capital stream were blind, as property prices rose and economic growth was high in countries like Spain and Greece. That this growth was based on a speculative bubble, became clear soon after. The financial crisis of 2008 changed it all. Now they had to play the game of the creditor countries, whose first reflex was to reduce the risk of their own banks. For example, studies show that 90% of the bailout money was used to pay the debts that private European banks had in Greece with public money. Creditor countries put the blame on weak governance and corruption as the main cause of the debt-crisis, ignoring faults within the financial system.

The result was a one-size-fits-all solution towards recovery of internal devaluation, proclaimed by the creditor countries, together with the IMF, European Commission and European Central Bank. This recovery strategy forced debtor countries to lower labour costs and wages in order to increase their international competitiveness, as devaluating their own currency was impossible. Their governments, therefore, had to increase VAT (expenditure tax) and reduce payroll taxes including national insurances. This left overall tax intake the same, but reduced the cost of hiring labour, which was assumed to be good for their international competitiveness. Secondly, the government had to reduce public sector wages and put pressure on other wages to decrease. The result was public spending cuts, lower wages, more flexible labour markets and lower pensions. The recovery pegged firmly to increasing international competitiveness, rising exports and austerity policies. At the same time, this path to recovery was an attack on European welfare states – one that had already started in the 1980s in the process to form a single market, but accelerated with this policy of recovery.

Cognitive capturing of the recovery programme

As a result, after more than 14 years of the euro, solidarity between countries and between citizens is at one of the lowest points in modern European history. This is well illustrated by the Greek bailout negotiations par excellence. For example, the debate about a new bailout deal at the start of 2015 went on for many months and was portrayed in Northern European media mainly as the ‘prudent’ Dutch, Germans, Fins and Austrians against the ‘irresponsible’ Greeks, Portuguese and Spaniards. But it is the Northern European countries, especially Germany, that benefited from the sovereign debt-crisis in Southern European countries due to lower interest payments on their own debts. Research from the Halle Institute for Economic Research shows that the debt crisis resulted in a significant reduction in German bond rates, yielding interest savings of more than EUR 100 billion (or more than 3% of GDP) during the period 2010–2015.

Long term decline of welfare state

Hence, the building blocks of the monetary union have worked as accelerator of mistrust and anti-solidary sentiments. European politicians and civil servants, bankers and financiers have all turned a systemic problem of financial architecture into a dispute between European nations. This was the opposite of what European policy-makers had always claimed the euro would bring; they said that a unified Europe would be forged one crisis at a time, which we would solve as Europeans together, not as nations in conflict.

Reality check – rising inequality

The ideal of a single currency that would generate wealth distribution within the borders of its member states can also be challenged. The single market, and with it the introduction of the single currency for most member states, highlights a rise in income inequality, with the highest increase in Spain, Ireland, Slovenia, Estonia, Greece and France between 2007–2010. Many blame the financial crisis for this rise, others austerity policies. But none of these views capture the whole picture. Instead, the cause has to be understood in the context of the continuing widening gap between rich and poor in the last three decades in all European member states, according to the OECD income distribution database. The crisis and the chosen recovery strategy only exacerbated income inequality after 2008.

Rising inequality

As The Broker has shown in its different dossiers, deliberate policies to increase international competition, deregulate labour markets, stimulate the financialization of the economy, and curb welfare states and social protection – all policies that can be tracked back to the European economic strategy to accomplish a single market – have had a huge impact on inequality. These policies and economic strategies have not only decreased the prospects of the lower economic classes, but have also had an impact on an increasingly struggling European middle class, which was the beacon of European integration in its early years.

Read more - The Broker dossiers on Employment and Middle Class

It is the economic model, logic and political strategy related to market liberalization that shaped the single market and, with it, the next step of realizing the single currency, which has increased inequality and lowered wages throughout Europe. Indeed, it is true that the European Commission celebrated 10 years of the euro by declaring that between 1998 and 2008 unemployment in the Eurozone decreased by 15%. However, investigation of the details exposes some worrying trends. In Germany, the Netherlands, Belgium and France, countries that adopted more flexible labour markets and wage moderation policies than other member states, jobs were mainly created at the low end of the labour market, including low-paid self-employment jobs, but not for the middle classes, increasing the divide between the middle classes and those better off. In Spain, Portugal and Greece employment increased for all economic groups, also the middle classes, but only because the influx of cheap capital resulted in a construction boom and speculative bubble.

Quote by Joaquin Almunia

Consequently, the decline in employment after 2008, increase in precarious work and increase in poverty levels in Europe are now more structural embedded in the economies of EU member states. Pointing the finger only at the financial crisis and proclaiming a strategy of going back to business as usual is not a suitable strategy to reinvigorate employment. There is increasing recognition among economists that there is no way back to high growth, investment and productivity using existing monetary and economic models.

What experts said about labour policies, employability and social control over employment

With unsustainably high debt levels in many European countries, and with the lowest ECB interest rates for many years (of nearly zero per cent), there is little room for stimulating economic activities by increasing public spending and lowering interest rates. This is what in economics is called ‘secular stagnation’. What the single market had already started, was accelerated by the introduction of the euro: a race to the bottom with limited policy space for countries to stimulate growth through country-specific monetary measures.

Data - Rising unemployment

A divided Eurozone, but with a single currency

It is clear that ideals about a single currency – from unity, to a more effective single market, job creation and wealth redistribution – have not materialized. Yes, the economic and financial crisis has made things worse for many Europeans. But the trends that created the current sovereign debts in Europe are the result of the policy and strategy underpinning the economic and monetary architecture of the Eurozone. Trends like the rise in inequality and job polarization are also the result of deliberate choices based on ideals of the economic model of market liberalization, which were incorporated into policies that started with the single market and accelerated with the introduction of the single currency.

Why policymakers keep saying there is no alternative

Instead of being open about the failures of the economic and monetary building blocks and working to solve the problems as a genuine union, including by changing policies, European finance ministers and governments have started pointing the finger at each other. There are many different scapegoats – from reckless bankers to corrupt politicians – and their victims are not just Greeks or Spaniards, but the numerous impoverished people throughout the whole Eurozone. Anyone who looks at the bigger picture of how the European Union developed into a single market with a single currency will see that what Europe needs most is an honest debate about how interdependent European countries with a single currency are. The future of Europe must be based on renewed unity and solidary, but by taking into account the different kind of economies and cultures that exist.

Such a new solidarity is only possible with a clear strategy to bridge the divisions and restructure the economies in Europe on a time-path that is set for individual countries. And such alternative strategies cannot be based purely on technocratic rules overruling democratic decisions. ‘We face a delicate balance,’ says economist Charles Wyplosz. ‘Institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets. This argues against assigning wide discretionary powers to fiscal institutions but it is fully compatible with giving them either the authority to apply legal rules or to act as official watchdogs.’


  1. Richard Baldwin and Charles Wyplosz, ‘The Economics of European Integration’, 2nd Edition, McGraw-Hill Education, 2006.


Authors: Frans Bieckmann, Evert-jan Quak

About the authors

Frans Bieckmann is former executive director and editor in chief at The Broker

Evert-jan Quak is now Research Officer for the K4D Programme at the Institute of Development Studies.

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