The single currency’s design isn’t perfect. But what’s really hampered its first 20 years are decisions freely taken by power-hungry men in Frankfurt

Adam Tooze

In the two decades that the euro has been around it has been branded as hopelessly and inherently flawed, a failure, and a tragedy for Europe. Its critics have blamed it for many things—from soup kitchens in Athens, to wild gyrations in the markets, and the arrival of angry populists in Rome.

Yet for all the charges, Europe’s single currency, and the European Central Bank (ECB) which manages it, are still here. No other institution has more influence on Europe’s future than the ECB, and there is no obvious alternative to it. For better, or— very often—for worse, it has dictated the single currency’s story since its creation. You can’t fairly appraise the euro—which Britain never joined, of course, but whose fate will have important consequences for us even after Brexit—without taking a view on the central bankers who manage it. And those central bankers, especially Jean-Claude Trichet, who headed the bank from 2003 to 2011, must shoulder much of the blame for Europe’s sluggish recovery, and the disturbing rise of nationalism.

IN THE B€GINNING

Central banks take time to establish themselves, and—at 20—the ECB is young. Today the world’s markets hang on every word of America’s Federal Reserve, which seems as permanent as anything in the world of finance. But the Fed’s birth, in 1913, was mired in controversy; when it turned 20, in 1933, the US economy was in the grip of the Great Depression, which makes today’s eurozone look like a picture of health. Indeed, if one goes further back, the rows surrounding the First and Second Bank of the United States—which were respectively railed against by Thomas Jefferson and Andrew Jackson—are a reminder that institutions charged with the governance of money always court controversy. Capitalism and democracy can make difficult bedfellows and central banks are caught in the middle.

As the issuer of currency, central banks are the lender of last resort both to high street banks and, at least normally, to governments too. They are thus expected to manage not only money, but also—effectively—exchange rates, public debt, the stability of the banking system and inflation. Furthermore, since wage inflation is linked to employment, they also have to monitor the labour market. Any action or inaction creates winners and losers. They may declare themselves “independent” of elected government, but central banks are inescapably political.

In the case of the eurozone, the difficulties are all the greater because it is the central bank for an economy the size of a continent, made up of regions as diverse as Belgium, Bavaria and Basilicata, without the fiscal or administrative apparatus of a nation state to back it up. The ECB rests atop a network of national central banks whose loyalties are inevitably divided between the eurozone and their national financial systems.

But that is only half the story. The euro was initially designed to contain the dominant influence that Germany’s central bank used to wield. To maintain their pegged exchange-rate against the mighty Deutschmark, the other central banks often had to march interest rates up and down in line with the Bundesbank. So they saw an obvious attraction in pooling control in a transnational institution. For the Germans, the formation of a European monetary system reduced the upward pressure on its currency, which could otherwise have threatened the trade surpluses on which Germany prides itself.