Euro – single currency shared by nineteen European Countries is unique in human history. Never before has a group of countries create a brand new currency that they would share.

The European project was inherently economic. To France, the key issue in establishing a European monetary union was ending asymmetric adjustment pressures: The euro was to end monetary dependence, both from the US dollar as well as from regional deutschmark hegemony, and to establish a global reserve currency that could stand up to the dollar as part of a new international monetary order. By contrast, the main German concern was to forestall the threat of deutschmark strength as undermining German competitiveness within Europe. Currency overvaluation stands in conflict with Germany’s export-led growth model.

The presence in the EMU of countries less competitive than Italy and France was in turn necessary to persuade French and Italian industrial sectors to give up the possibility of competitive devaluation against German exports. The illusions of industries in the peripheral countries that this process would also work for them failed when European labor costs began their race to the bottom. That is when German unions responded hyper-cautiously to industry’s threats to move plants to the newly included eastern countries. Germany’s real depreciation put its competitors in other countries in a hopeless position. With the option of devaluation foreclosed and the absence of any union-wide industrial policy aimed at uplifting exports in periphery, technological dependency and over-indebtedness became inevitable.

A solution to these asymmetries and resulting fragility implied an assumption of responsibility by the more competitive countries for the less competitive ones. Its absence, by placing the roots of the problem onto stereotypical tales of hardworking citizens of “center” countries and “siesta” loving inhabitants of the “periphery”, against all evidence, was and still is damaging for the whole Europe.

The common currency is a relic of its times. As a child of the late 80s and early 90s, its founders shared now-defunct notion that if only you could limit deficits and inflation, the market would take care of everything and you would quickly get to full employment. Strong belief it's the financial markets who do a better job imposing the necessary fiscal discipline on potentially fiscally irresponsible governments than inter-governmental treaties or promises by politicians, made Euro vest heap of economic sovereignty from member states back to the market.

When entering the monetary union, the fiscal authorities of member states are effectively limited to issuing debt in a foreign currency they do not control—which means they agreed to subject themselves to the discipline (or if one wants whims) of global bond markets. Public debt in this scenario increases capital’s power over the state: a government that is not pursuing market-friendly policies will find it hard to get a loan. This way, Eurozone member states have given up fiscal policy sovereignty in a much more radical manner than is suggested by the deficit and debt conditionalities. Thus, governments are at mercy of often ‘irrational” market sentiments which can trigger abrupt stops in the funding of the government debt, setting in motion a devilish interaction between liquidity and solvency crises.

There is an important further implication of this increased vulnerability. This is that member-countries of a monetary union loose much of their capacity to apply counter-cyclical budgetary policies. When during a recession the budget deficits increase, this risks creating a loss of confidence of investors in the capacity of the sovereign to service the debt. This has the effect of raising the interest rate, making the recession worse, and leading to even higher budget deficits. As a result, countries in a monetary union can be forced into a bad equilibrium, characterized by deflation, high-interest rates, high budget deficits and a banking crisis.

One also has to take into account that the European Central Banks independence is the reason why the risk of default even exists for member states. Crushing the central bank and treasury link undermines the joint powers normally enjoyed by the treasury-central bank alliance in the currency sphere of sovereign nations, whereby the treasury is strengthened by the central bank’s underwriting of liquidity while the central bank’s credibility as lender of last resort, in turn, is strengthened by the treasury’s “deep pockets” as fiscal backing, too.