Euro: Less robust than you think

OECD Observer

Future of the euro 

Letter to the editor: Sir, Vincent Koen pronounces the euro to be a success, and argues that economic fundamentals suggest that the euro will appreciate against the US dollar over the longer term. I believe that such an assessment is premature: while the euro may appreciate in the medium term, its longer-term prospects look less robust.

It is necessary to be honest about what economic and monetary union is. It may sound and look like an economic accord, but in reality it is at first a political deal – from the premises of its inception to the discounting of the Maastricht criteria in 1998. EMU has merely glossed over the fault lines (of which I think five are significant) between the participating economies. While some of these – such as the pace of deregulation – are problems for the European Union in general, I would argue that the real risks to the euro arise from the differences among the countries. In the face of electoral pressures, national governments will seek accommodations. Instead of promoting greater intra-EU competitive pressures, the euro may foster more political interference with economic affairs, undermining the European Union’s long-term growth prospects.

The first of the fault lines is the asynchronous business cycles. The second fault line is the transmission of monetary policy, which acts on different lags and with varying impact on output on the national economies. Taken together, these two points suggest that while the ECB may be able to set an optimal monetary stance in the aggregate, monetary policy may be inappropriate for individual countries. Countries feeling excessively squeezed may demand a loosening of policy, leading to an inflationary bias for the euro area as a whole, and a risk that some of the more dynamic economies could over-heat. The third schism is the labour market: without a flexible exchange rate to mask trends in real wage differentials, but with continued labour market rigidities, unemployment may prove to be the mechanism that brings unit labour costs into greater alignment in the euro area. This could translate into legislation to protect jobs – jeopardising future employment growth.

The fourth potential problem is the pace of regulatory reform, much of which is determined in Brussels. While it is true that the EU is engaged in a process of liberalisation, so is the rest of the world. As the cliché goes, in the old economy, size was important, but in the new economy, speed counts. Those who reform more rapidly will be frustrated as the more lethargic countries hold up the pace of liberalisation at the EU level. Finally, there are longterm fiscal imbalances, notably the generational imbalances caused by an ageing population and expensive pension commitments, which could undermine the EU-wide commitment to fiscal prudence.

The dynamics of EMU will undoubtedly make the euro area a more homogeneous economic unit, and I do not think EMU will collapse. The risk to the euro is that competing national interests will render the euro area an unattractive business environment, and capital will flow out to seek better rates of return. The euro was designed to replace the Deutschemark, with the hope that it would replicate that currency’s postwar success. It may end up looking more like the British pound, with periods of strength unable to mask a longer term weakness.

MARK FEIGE, Washington DC

©OECD Observer No 221/222, Summer 2000 (Forum edition)

Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly

Online edition
Previous editions

Don't miss

  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • “Nizip” refugee camp visit
    July 2016: OECD Secretary-General Angel Gurría visits the “Nizip” refugee camp, situated between Gaziantep and the Turkish-Syrian border, accompanied by Turkey’s Deputy Prime Minister Mehmet Şimşek. The camp accommodates a small number of the 2.75 million Syrians currently registered in Turkey, mostly outside the camps. In his tour of the camp, Mr Gurría visits a school, speaks with refugees and gives a short interview.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • Queen Maxima of the Netherlands gives a speech next to Mexico's President Enrique Pena Nieto (not pictured) during the International Forum of Financial Inclusion at the National Palace in Mexico City, Mexico June 21, 2016.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • OECD Environment Director Simon Upton presented a talk at Imperial College London on 21 April 2016. With the world awash in surplus oil and prices languishing around US$40 per barrel, how can governments step up efforts to transform the world’s energy systems in line with the Paris Agreement?
  • Happy 10th birthday to Twitter. This 2008 OECD Observer interview with Henry Copeland said you’d do well.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Once migrants reach Europe, countries face integration challenge: OECD's Thomas Liebig speaks to NPR's Audie Cornish.

  • Message from the International Space Station to COP21

  • The carbon clock is ticking: OECD’s Gurría on CNBC

  • If we want to reach zero net emissions by the end of the century, we must align our policies for a low-carbon economy, put a price on carbon everywhere, spend less subsidising fossil fuels and invest more in clean energy. OECD at #COP21 – OECD statement for #COP21
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa.
  • Pole to Paris Project
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • How can cities fight climate change?
    Discover projects in Denmark, Canada, Australia, Japan and Mexico.
  • Climate: What's changed, what hasn't, what we can do about it.
    Lecture by OECD Secretary-General Angel Gurría, hosted by the London School of Economics and Aviva Investors in association with ClimateWise, London, UK, 3 July 2015.
  • Is technological progress slowing down? Is it speeding up? At the OECD, we believe the research from our Future of ‪Productivity‬ project helps to resolve this paradox.
  • Is inequality bad for growth? That redistribution boosts economies is not established by the evidence says FT economics editor Chris Giles. Read more on
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .

Most Popular Articles


What issue are you most concerned about in 2016?

Euro crisis
International conflict
Global warming

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2016