Europe at 60 (and readings on how euro survived)


The European Union celebrated the 60th year of its existence recently, which has evolved from a small community (the European Coal and Steel Community) of 6 founding member states (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) to its present state today. It has been exactly 60 years since the European Economic Community or the ‘Common Market’ was created by the signing of Treaty of Rome in March 1957.

Things are finally looking a bit better economically, but there is little doubt that the existential crisis continues, particularly since the U.K. voted to leave the Union last July.  And now, the Union has to decide on its future 0r pick one of the 5 scenarios fleshed out in this very interesting White Paper, prepared on the occasion of EU60.

But one of the most fascinating — and arguably favorable — developments has been the very survival of the euro as a single area currency, against all odds — or against a theory that said you can’t work out a common currency without having the proper conditions in place.  At around the time of the climax of the euro crisis — like around 2011-12  – most luminaries had in fact given up hope on the project, based on the teachings of the so-called “Optimum Currency Area” (OCA)  literature – the idea that if you like a bunch of diverse entities to use the same currency, you need to have “4” other things properly in place.  Two of these are the so-called “traditional criteria” (of labor mobility and a fiscal union) and the other two have been pretty much learnt during the EZ crisis itself: the need for a banking union and for a lender of last resort. Here is an excellent lecture delivered by Paul Krugman back in 2012, which also makes perfect teaching material…

The OCA theory was a very convincing one (and Krugman’s was a very convincing lecture) but the euro nevertheless survived – so far. So how did it happen? This paper to my knowledge offers the most comprehensive explanation (HT: Nicholas Veron), a summary of which is available here.  There are also some smart people who think that the problem of the Zone was not design failures or the euro as such, but was rather “bad policies”, as reviewed here.