MANY BRITISH TORY Eurosceptics trace their beliefs back to the 1992 Maastricht treaty which agreed to create a single currency. To them, Maastricht represented a Franco-German stitch-up. The French president, François Mitterrand, accepted German unification, and in exchange the German chancellor, Helmut Kohl, agreed to give up the D-mark for the euro.

In fact money was crucial from the very start of the European project. In the 1950s Jacques Rueff, a leading French economist, declared that “Europe will be made through a currency, or it will not be made.” After the break-up of the Bretton Woods international monetary system in 1971, European countries made many attempts, usually in vain, to ensure currency stability through such arrangements as the “snake”, the European monetary system and the exchange-rate mechanism.

A move to a single European currency may have seemed a logical extension of such efforts, yet it was far more momentous. However fixed an exchange-rate arrangement pretends to be, it can be altered at any time. Indeed, that is what happened repeatedly in the 1980s and 1990s. The point of the single currency was to put an end to such disruption. By launching the euro in 1999 and replacing national notes and coins in 2002, the EU was not just underpinning the single European market, its most successful project. It was also taking a giant leap towards deeper political and economic integration.

The design of the euro suffered from two big defects that still haunt the single currency

Yet the design of the euro suffered from two big defects that still haunt the single currency today. The first concerned the selection of countries that were able to take on the discipline of joining a single currency. Clearly France had to be a founding member, but beyond that the German government thought that, at least initially, the club should be kept quite small. The Maastricht criteria setting debt and deficit levels for would-be members may not have made economic sense, but they made political sense to Germans keen to keep out unreliable Mediterranean countries, most obviously Italy. At Maastricht it was already clear that Britain (and later Denmark) would stand aside.

During the 1990s Italy, too, toyed with letting economic and monetary union go ahead without it, partly because its public debt was far above the Maastricht ceiling of 60% of GDP, but also because its post-war economic success had been built on frequent devaluations. Yet when Spain and Portugal showed themselves determined to join the euro from the start, Italy, as a founding member of the club, felt it had to be there, too. The limits set in both the Maastricht treaty and the later stability and growth pact were fudged, so that at the outset the euro zone embraced 11 countries. Shortly afterwards Greece sneaked in as the 12th.

Don’t delay, reform today

At first all went well, with robust growth and modest inflation. The Mediterranean countries benefited from interest rates converging downwards. But that meant they could avoid the pain of pushing through structural reforms to make their economies more competitive. Many economists pointed out that such reforms were more necessary than ever for countries no longer able to devalue or run their own monetary policy, but politicians were all too ready to avoid unpopular remedies. One result was a worrying divergence in growth and unit labour costs, a proxy for countries’ competitiveness (see chart).

That was to cause serious trouble when the second big defect in the euro became apparent towards the end of its first decade: its flawed architecture. There was a no bail-out rule but no provision for what to do if national governments needed help, a serious omission given that their debts were now, in effect, denominated in a foreign currency over which they had no control. The euro had no central funds that could be drawn on to assist members if they were hit by external shocks. Though banks had become increasingly European in life, they remained unavoidably national in death; yet national central banks had neither the ability nor the resources to rescue or restructure the biggest ones. The European Central Bank (ECB), for its part, was unable or unwilling to act as a lender of last resort.

Enthusiasts for European integration did not see any of these problems as insuperable, because they expected monetary union to lead inexorably to closer political union. Many still do. But there was little sign of this during the euro’s first decade. Even the budget-deficit rules set by the stability and growth pact were ignored, with France and Germany ironically being identified in 2003 as the first rule-breakers. When in 2009 the single currency, structurally vulnerable as it was, became engulfed by the biggest global financial crisis since the 1930s, its problems quickly became glaringly obvious.

The ensuing euro crisis has lasted for what seems like many years. An emergency bail-out fund that later became the European Stability Mechanism (ESM) was established with the support of the IMF. First Greece and then successively Ireland, Portugal, Spain and Cyprus were forced into bail-out programmes. Because the crisis began in profligate Greece, the prescribed cure was usually fierce public-sector austerity, even though in most of the other countries excessive public spending and borrowing were not the root problems. The turning-point came in July 2012, when Mario Draghi, the ECB’s president, declared that his institution was ready to do “whatever it takes” to preserve the euro. This was followed by moves towards a banking union, with the ECB taking over supervision of Europe’s largest banks.

In general, when compared with America and Britain, the euro zone has been too quick to cut public spending and raise taxes; too slow to sort out its banks, many of which are still heavily burdened with bad debts; and too hesitant to push through structural reforms to its labour and product markets to improve competitiveness. Yet despite these failings, the euro zone’s ills are easily exaggerated. Klaus Regling, the managing director of the ESM, likes to point out that, measured by GDP per person (rather than absolute GDP) and employment (rather than unemployment) rates, the zone’s performance in the past 15 years has not been so much worse than America’s. Today all members of the euro zone, even Cyprus and Greece, are just about growing—and all save Greece have regained access to capital markets.

In a sense, though, the euro’s problems have merely mutated from acute to chronic. Pierre Moscovici, the EU commissioner for economic and monetary affairs, complains that growth is still too low; that differences between north and south remain large, and convergence has stopped or gone into reverse; and that the region suffers from serious imbalances, including a German current-account surplus of almost 9% of GDP. Germany remains overly dependent on external demand. Indeed, since the crisis and the bail-outs, the entire euro zone has shifted to a large current-account surplus, which may cause continuing tension with big deficit countries such as America and Britain.

The ins and outs

The composition of the euro zone, which since 2002 has expanded to take in the three Baltic countries, Slovenia, Slovakia, Cyprus and Malta, remains problematic. As one senior official in Brussels puts it, the euro works tolerably well for 16 of its members, but not for three: Greece, Portugal and, most problematically, Italy. Indeed, the real threat to the euro may not be Greece, given its small size. Many believe that the single currency could even survive a Greek exit from the euro, though others are worried about it (see box, previous page). But Italy has seen no net growth in GDP per person since the euro started in 1999, a calamity for a developed country and a big reason why two of its main political parties favour a referendum on euro membership. Italy might be said to be both too big to fail and too big to bail.

There has been talk of a renewed Franco-German initiative to relaunch and strengthen the euro after this year’s spate of elections, yet differences between the two countries run deep. German officials were openly negative about the “five presidents’ report” in 2015 (by the presidents of the European Commission, the European Council, the Eurogroup of finance ministers, the European Central Bank and the European Parliament), which proposed much deeper integration for the euro zone. The French are keener on such ideas, but Germany holds the key. Even if Mrs Merkel were replaced by Mr Schulz as chancellor, the Germans would be unlikely to shift position that much.

That is because, as a recent book (“The Euro and the Battle of Ideas”, by Markus Brunnermeier, Harold James and Jean-Pierre Landau) shows, there are deep philosophical differences between the two countries over how the euro should be run. The French want to complete the banking union with a new system of common deposit insurance and bank resolution. They favour a gouvernement économique to counterbalance the ECB, with a euro-zone finance minister, a euro-zone budget and even a euro-zone parliament. They hope to move towards the creation of a mutualised debt instrument or Eurobond. Yet they resist the imposition of tougher fiscal restraints on national governments and they dislike being told what reforms to undertake.

The Germans accept the need for deeper integration if the euro is to survive, let alone thrive, but they object to how the French propose to achieve it. They see demands for common deposit insurance, a euro-zone budget and Eurobonds as tricks designed to transfer money from German taxpayers to profligate countries. They do not share the French taste for flexibility in fiscal policy, preferring discipline and rules. They fret that bail-outs or debt restructuring create moral hazard, and experience has taught them to take Parisian promises of reform with a large pinch of salt. And even were a Chancellor Schulz more amenable, hardline allies like the Dutch and Austrians would resist.

The euro, in short, remains a troubled currency, with question-marks over both its membership and its direction. There is general agreement that it needs further integration, but disagreement about how to go about it. Germany and other creditors feel that they are being asked to show solidarity with other euro-zone countries but are seldom offered reform and budget discipline in return. This has fostered an ugly anti-German mood in some countries. Germany, in turn, complains about a lack of solidarity in another area: immigration.