February 28, 2015


At the euro’s launch in 2002, the world witnessed the unprecedented formation of a new currency without a state. But while the introduction of the euro centralized monetary policy, it left most fiscal policy in the hands of national governments. The rapid acceptance of the euro as a viable currency and the deeper financial integration of the Eurozone that followed were greeted as stepping-stones toward greater prosperity across the European Union. Observers viewed Europe’s emerging large current account deficits, particularly those of Portugal, Ireland, Italy, Greece, and Spain (PIIGS) as a validation of the gains associated with capital flowing from the center of the EU to its periphery, and a strong counter to the arguments about the limited benefits of importing foreign savings as a means of financing domestic growth.

The honeymoon period for the euro ended in 2010, however, as the unfolding crisis revealed the dangers inherent in the monetary union. Germany’s persistent current account surplus was putting intolerable pressure on the Eurozone periphery and creating a standoff between EU creditor and debtor countries. Germany’s economic and political decisions were creating instability within the EU, much in the same way German military power once did.

This should hardly have been a surprise. Germany is the largest country in the EU by population, GDP, creditor capacity, and among net contributors to the EU budget (16 billion euros). In addition, while 60 percent of German exports go to the Eurozone, Germany’s international economic reach outstrips all other EU member states: 27 percent of all EU exports come from Germany, several times the amount of France, Italy, the United Kingdom (UK), the Netherlands, and Spain. Today Berlin accounts for about 25 percent of China’s total trade with Europe and is the most influential European player in China. A decade after its launch, the euro remains a currency without a state, but dominated by Germany.

This reality has become the subject of a lively debate across the EU and within Germany itself.

What could go wrong?

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