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The euro: more light than shadows of an integration dream


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Isabel Rodríguez Tejedo

Lecturer at School of Economics at the University of Navarra

If it were a person, the euro would not only be old enough to vote, but would also be about to finish a university degree degree program . More than the twenty years since the single currency was introduced, this is the image that most reminds us that there is a whole generation of citizens who have never held a peseta in their hands, except perhaps out of curiosity. Many of these young people have probably taken an end-of-year "European trip" to programs of study, where you sleep today on a bus in one country and wake up tomorrow in another. But what they will not have done is that gesture that was customary for their parents, that of looking in their backpacks, going through several envelopes, for the coins needed for the trip, to find the currency that is due today. Here pesetas, there francs (without mixing the French and Belgian ones) and for Thursday marks.

The euro was a clear symbol of a vocation for integration, a palpable and visible result of a political process that sought a more united Europe, where prosperity would be the vaccine for not repeating warlike conflicts. The single currency has facilitated the movement of people and goods between EU countries, integrating physical and financial markets. It has also allowed for a greater international presence, making a place for itself alongside the dollar as the currency of reference letter. Today, the euro is the world's second currency reservation and nearly half of all international payments are made in euros.

Trading in the same currency eliminates the uncertainty associated with currency exchange and its associated costs. A day-to-day example can be found in the ease with which consumers can shop online in countries in the currency union. The common currency allows for easy comparison of prices, making it obvious where to find the best deal for a consumer who might be intimidated by currency exchange. This scenario, everyday and easy to understand because of its closeness to our lives, extends to more complicated buying and selling operations of small and medium-sized businesses, and also to investment decisions. 

But the implications of this euro advantage go beyond mere convenience. They mean an improvement in the position of companies that are disadvantaged because they are located in places with higher country risk. With the stability that the euro lends them, these companies can access financing on more advantageous terms. The euro has also opened up investment opportunities based on the merits of the proposal investor, eliminating the subject exchange rate risk associated with more volatile currencies.

The euro is more than the banknotes and coins in our wallets, or what we call prices, liabilities and assets. It has been a major economic and institutional integration. By abandoning national currencies, countries left behind their own monetary policy, one of the traditional instruments of economic policy. This Withdrawal has brought benefits and costs.

The benefits include greater commitment to supranational rules and, especially for countries with less credibility in monetary policy, a clear stance against high inflation and a commitment to prudent monetary policy. Also the possibility of risk sharing, with a strong central bank that can take decisive action (e.g. by purchasing assets) if necessary.

Among the costs is the loss of flexibility implied by relinquishing control over an economic policy tool . This is particularly important because the cycles of the countries of the monetary union are not perfectly synchronised, which means that the optimal monetary policy is not necessarily the same for all of them at any given moment in time. Given Germany's importance in the common system and the Germanic country's history with inflation, there has always been a suspicion that the common monetary policy was more like German monetary policy than it should be.

The financial crisis was a good example of the light and shadows of the common monetary framework . On the one hand, it allowed for a strong European Central Bank, with great capacity to intervene in the market. On the other hand, it highlighted the problems of trying to use a single tool for different problems, very specific to each country. "Leaving the euro" then became a possible door to cross, although where that door led to was a question with as many answers as there were people.

The latest crisis, this time with health rather than financial origins, has once again highlighted the cracks in the integration dream we call Europe. But even if today's young travellers have to look in their backpacks for their Covid passports or the results of the latest PCR, what they can't think of is looking in their wallets for a currency other than the euro.