Lionel Laurent

An Awkward Birthday for the Euro

What to Expect in 2022

The year will be a money milestone. Jan. 1 marks two decades since the first euro banknotes and coins got into people’s pockets. Even anarchic Bitcoiners should care: The euro was the first new currency of the 21st century (though clearly a product of the 20th). It was viewed with skepticism by economists (there was no country called ‘Euroland’, after all). It sought to counter the dominance of the US dollar. And it aimed to banish high inflation and national currency mismanagement to the past. It also came with a lot of heady optimism about peace and prosperity.

As the above tracker of euro-area financial-market stress shows, the initial euphoria didn’t last, and the sovereign debt crisis of 2011 saw hedge funds openly bet on a collapse of the single currency. But Europe’s handling of Brexit and Covid-19 has been far less messy, and the willingness of Germany to keep walking the path towards more integration — including joint borrowing — means the euro can claim to have reached maturity.

Where things get awkward is that for all the steps taken towards building something close to Euroland, the pandemic is likely to leave economic scars that may build up conflict between the union’s disparate parts in the future. The euro area went into the Covid crisis bearing the mark of a decade of underinvestment, rising debt and public spending cuts. It’s emerging from it with a widening gap relative to the U.S. economy, an uneven North-South divide as tourism recovers slowly, and a debt load requiring high economic growth and low interest rates to manage.

Euro-area policymakers need to get a lot of things right, starting next year. Emergency Covid support needs to be lifted carefully; stimulus money has to be spent, both quickly and well, to meet environmental and digital goals; common rules governing debt and deficits need to be rewritten without bad blood. The European Central Bank must also avoid bungling a rise in consumer-price inflation, which hit record levels recently. Emmanuel Macron’s failure to win re-election in France or a Mario Draghi ascendancy to the Italian presidency could make this all harder.

Consumers’ pandemic euphoria around cryptocurrencies is also something for euro architects to take seriously. We live in a world where money is a meme, and where private coinage can be created (and killed) overnight. When Facebook proposed a currency called Libra in 2019, it was openly attacked by governments as a threat to national sovereignty. If the future of money looks less like those 20-year-old euro coins and more like a digital euro issued by the central bank, that’s another big experiment that policymakers have to get right — while regulating crypto rivals.

Next year is unlikely to see a ramp-up in doubts over the euro’s survival. But the currency remains an incomplete “fragile construction,” as academics Paul de Grauwe and Yuemei Ji recently wrote, and it would be a shame if next year’s birthday back-slapping heralds complacency.

From the Year Behind Us:

Bitcoin Is An Incredibly Dirty Business: What would Bitcoin really be worth if, in order to care for the world it set out to revolutionize, it changed its algorithm, or if miners unhooked themselves from cheap power?

Submarine Crisis Is Way Deeper than French Pride: It is dangerous to write off Paris’ fury over Aukus as temporary or theatrical. This dispute will reverberate across Europe.

Venice’s Cruise-Ship Ban Is Just the Beginning: If one of the world’s most-visited destinations can curb tourism’s excesses after the pandemic, anyone can.

Britcoin Is the Other Crypto Meme That Matters: Crypto mania fits the pandemic present, but governments have their own ideas about the future of digital cash. They need to make them a reality.

Will Europe’s Climate Wars Become a Class War?: The EU’s crackdown on fossil fuels needs redistribution, innovation and investment to avoid a rerun of the Gilets Jaunes.