The Euro is the official currency of the Eurozone, a currency union consisting of 20 out of the 27 European Union member countries, with Croatia being the most recent to adopt it on the 1st of January 2023. Initially, the Euro was launched as a virtual currency on the 1st of January 1999, only used for things such as accounting and electronic payments. Initially, eleven member states, including Austria, Belgium, and Spain adopted its virtual form. Only three years later, on the 1st of January 2002, the Euro was finally launched in physical form with coins and banknotes being introduced. 

Seven years prior to the release of the Euro, the “Economic and Monetary Union of the European Union” (EMU) was founded in 1992 with the signing of the Maastricht Treaty. The EMU aimed to integrate the economies of the European Union, which would then create more favourable conditions in which a common currency could be implemented. It did this, for example, by ensuring reduced exchange rate volatility and by reducing cross-border transaction costs. Importantly, joining the EMU meant that members had to leave behind their own monetary policies and accept a common policy based on the Euro and controlled by the European Central Bank. To many countries, the prospect of having both a shared currency and monetary policy was highly appealing, perhaps most pertinently due to the increase in trade that it could result in. Unfortunately, since its implementation twenty-four years ago, the Euro has been linked to economic crises in several countries, most notably Greece in 2009 in the dark aftermath of the 2008 financial crisis. Such crises have severely impacted the economic stability of these countries, which (in most cases) has precipitated both social and political instability .

One of the most conspicuous issues with the Euro and the economic infrastructure that supports it is the idea of a shared monetary policy under the ECB. The ECB is responsible for setting three key interest rates within the Euro-adopted countries, with the aim of steering inflation towards the target of 2%. These three significant interest rates are: the main financing rate (rate for commercial banks borrowing from the ECB in the medium term), the marginal lending rate (rate for commercial banks borrowing in the short-term) and the deposit interest rate (rate charged to banks for storing finances (money) at the ECB overnight). 

The most crucial aspect is that, regardless of individual countries’ inflation rates, the interest rates set are the same for everyone. For example, if a country is experiencing high levels of inflation, the most suitable monetary measure would be increasing interest rates, as this creates a greater incentive to save and discourages borrowing. Thus, consumption within the economy decreases and drop to meet decreased demand. A good way of exemplifying just how damaging this lack of monetary control can be was during the Greek financial crisis (2009), when Greece had severe monetary policy inflexibility, which was exacerbated by the corruption and inefficiency regarding the reporting of the government’s debt levels. This caused what is known as a ‘sovereign debt crisis’, where Greece could not repay its debt and by 2018, Greece still owed 290 billion Euros to the IMF (International Monetary Fund) and the EU combined. As well as leaving Greece in significant debt, the crisis also led to a substantial decrease in global confidence in the Greek economy, leading to a rising cost in the risk insurance on credit default swaps (compensation for defaulting on repayments), which further added to the financial instability and uncertainty. This notion of a lack of control for individual countries is at the root of one of the Euro’s most fundamental issues – countries’ inability to utilise monetary policy to suit their personal needs according to domestic inflation.

Another significant issue with the Euro and its regulations is the loss of exchange control as a means of macroeconomic management. An exchange control refers to a regulation of the flow of foreign currencies within a country to stabilise the domestic currency. It may also help to protect its industries from overseas competition. As part of the EMU, a country is expected to abolish all capital and currency movement restrictions between member states to increase trade and make it easier for them to manage the monetary policy of the Eurozone as a whole. This level of restriction upon an economy can be incredibly damaging, as it means that a country has a weaker grip on inflation. This comes down to how they cannot control the amount of foreign currency utilised to purchase goods and services within the economy, as they cannot control the flow of foreign currency. 

Although the EMU controls the monetary policy of its member countries, it does not preside over its fiscal policy; thus, there is scope for fiscal mismanagement to be detrimental to the stability of the Euro. The lack of fiscal union within the EMU means that member countries are left to determine their taxation and spending policies, even though they are bound to a monetary policy externally determined by the ECB. Despite the existence of the Stability and Growth Pact (SGP), there is nothing that guarantees the imposition of sanctions if fiscal objectives are not met. This is something that has occurred frequently throughout the lifespan of the EMU, such as Germany and France’s failure to meet targets in 2003 without consequences. Part of the Euro-adopting countries’ economic instability has been caused by the  fact that macroeconomic disturbances cannot be managed without a central structure that administrates expenditure and (tax) revenue collection. This means that, in the absence of a fiscal union, the instability of the Euro perpetuates. Several ideas can support this claim; for example, introducing a fiscal union will mean more fiscal risk sharing, which refers to deviation from expected fiscal outcomes such as an unbalanced budget. However, there would also be scope for more fiscal relief during a recession. 

Although the Euro does, of course, have its advantages – mainly the increased facilitation of trade and cooperation between EMU countries – the lack of flexibility for individual countries to impose their own monetary policy puts them in a somewhat insecure position regarding their vulnerability to the damaging effects of inflation and deflation. The holistic lack of control that economies have over their own currency if they adopt the Euro is also shown by the exchange control inflexibility. Moreover, the absence of a fiscal union to accompany the monetary union has exacerbated macroeconomic imbalances between countries. This is not to say, however, that nothing can be done to ‘save’ the future of the Euro. The first step towards ensuring the security of the Euro could be the political integration of European countries. If this is achieved, it will pave the way for greater economic integration (particularly fiscal integration). This may also help to limit the financial irresponsibility of European countries, which was a significant cause of the Greek financial crisis and will undoubtedly lead to a more credible Euro.