The Euro, Theoretical Expectation versus Economic Reality?

Abstract: The euro was launched to great fanfare as a physical currency in 2002 but the very idea of European Economic & Monetary Union (EMU) was and continues to be a controversial and hotly debated topic. Nine years since that date, this paper revisits the debate that took place in the lead up to the Euro and the theoretical benefits and costs that were highlighted at that time. It aims to critically analyse the track record of the single currency to see whether such costs and benefits have been borne out in the historical record. The paper argues that the Euro has failed to have the large trade and price convergence effects that were theorised. In contrast, many of the theoretical costs that were pointed to can be seen in the Euro’s history as the European Central Bank followed a monetary policy that definitively failed to suit all its different members and the currency has been a source of asymmetric shocks and trends. With previously booming periphery countries facing huge debt problems and deflationary pain, the EMU project stands at the crossroads. This paper finds that although a break up is very unlikely, steps must be taken to make the project work more optimally.