The Euro and the Euro Area: Flawed Construct or Unfit Members?

The introduction of the euro was a political rather than an economic decision. Central banks opposed it, and European Union experts, including Sándor Lámfalussy, expressed their concerns that the harmonisation of the tax and fiscal policies leading to the economic union had not even been started, and Member States were reluctant to take even the initial steps. The establishment of the European Central Bank and the single monetary policy are necessary but not sufficient conditions for the operation of the euro area. The EU budget is inconsequential compared to the combined national budgets (one larger portion comprises the controversial agricultural subsidies), and it is unable to address the free movement of labour and capital within the integration or perform the necessary redistribution of income. Claiming that it is an optimum currency area does not hold water either. First, the political nature of the euro area dominates in the original formulation of the theory and also in today’s focus, and second, in view of the present and its envisaged future, the euro area is based on the logic of geographical location. One question entailing profound consequences was not posed or answered during the introduction of the euro: what will happen if the individual economies of the members do not converge to the developed ones based on either real or nominal indicators, but rather diverge from them, and as a result the financing requirement of the balance of payments in certain countries steadily increases? No exchange rate adjustment can be performed, and the national government is unable or unwilling to reduce wage and income transfers, which would be an option for adjustment. Taking a look at the forced exchange rate adjustments in the more advanced European countries in the 30 years prior to the birth of the euro area, it should come as no surprise that after past and future enlargements of the euro area the real and nominal productivity developments of certain members exhibit divergence, the impact of which should be addressed.