Lithuania adopted the euro on January 1, 2015, as the 19th country to do so. The euro is also used as legal tender by some small non-member countries like Montenegro, while others, such as some in West and Central Africa, have pegged their currencies legally to the euro, writes Prince Michael of Liechtenstein.
Opinions on the principle of the euro are divided. Germany’s Chancellor Angela Merkel once said that the end of the euro would be the end of the European Union. On the other side, the euro is given as the main reason for southern European economies being uncompetitive and, therefore, responsible for the fiscal problems in these countries. The argument is that if weak countries had their own currencies they could devalue and be more competitive.
In some northern European countries anti-euro and anti-European Central Bank perceptions exist. Expansionary monetary policy, especially buying the sovereign bonds of weak member countries, is considered negative. This argument has some justification as the ECB becomes involved in fiscal politics, directly supporting countries in distress.
This is not the ECB's mission. Its role is to set monetary policies, independent of politics, in order to guarantee the euro’s stability.
It is widely believed in Europe and the US, although not supported by facts, that a harmonised economic policy is necessary to get one currency to work. This lack of common economic policy is advanced as the euro’s problem.
Looking behind the emotion and pre-suppositions, the euro itself is not the problem. But problems are manifold:
- Lack of respect for the criteria for reasons of political expediency: The EU’s two largest members - Germany and France - broke the criteria of a maximum deficit of 3.5 per cent of GDP a year after the euro was introduced. This set a lethal example to others. When Greece joined the eurozone all principles were ignored.
- Irresponsible overspending by member countries: Excessive sovereign debt is not caused by the euro but by populist politics. Political parties in different countries are basically buying votes through favours to the public. The problem was easy finance as public debt from eurozone countries had top investment-grade ratings, against all economic logic.
- The density of the European regulatory framework, exacerbated by national regulations, caused problems for southern European businesses adapting to a competitive level in an open market. Currency devaluation is only a short-term remedy. It would have been better to give them more time to adapt with fewer regulations. The regulatory framework also gave existing large businesses a huge competitive advantage.
- As construction boomed, thanks to low interest rates and EU grants, large parts of the economy were readjusted to construction, especially in Greece and Spain. Disaster was imminent once the boom ended. Low euro interest rates helped create debt and a property bubble.
We can still consider the euro a positive achievement even with all its weaknesses. The looming danger is that the ECB could become increasingly politically expedient, buying more sovereign debt and therefore supporting irresponsible politics.
A return to respecting the criteria is essential.
Not every country has to remain in the eurozone if it is unable or unwilling to meet the targets. The departure of Greece, for example, should be possible without causing a European disaster.
Lithuania had pegged its currency, the lita, to the euro since 2002 for reasons of trade policy and to avoid strong fluctuations on its small currency. Lithuania, a small country, did its homework like other Baltic countries. Finally joining the eurozone officially is a positive sign of confidence - in both the euro and Lithuania’s economy.