A European fiscal union is a vanishing dream

In 25 years of the euro, the single currency has brought division rather than unity to the EU.

Illustration by Michael Villegas / Ikon Images

The three states that have given the EU the most trouble internally in the past decade are the UK, Poland and Hungary. What they all share is that none of them ever joined the euro, which turned 25 years old this month.

I do not think this is a coincidence. Imagine what Brexit would have been if the UK not only had to leave the EU but also change its currency and central bank at the same time? The reason Viktor Orbán, the Hungarian prime minister, can cling to the notion of a Europe of fully sovereign nation states, is precisely because his country is not part of the EU’s biggest project of political integration in its history.

I recall a conversation a long time ago with the former Italian finance minister Tommaso Padoa-Schioppa, who had served on the board of the European Central Bank right after it was founded. Padoa-Schioppa, who died in 2010, was an economist through and through, but he saw the euro primarily as a geopolitical vehicle. For him, the single currency was about power.

I believed that too. But the grand experiment has failed. It succeeded in only a narrow sense: the euro has not broken up, and it is technically well managed. The euro’s tragedy has been that EU leaders lost interest in completing the project of economic and monetary integration after the currency’s introduction in 1999.

At the time, I respected the UK’s decision not to join the euro. There was a greater awareness in Britain about the political consequences of a monetary union. The Germans in particular were in denial on this point, reducing the raisons d’être for monetary integration to economics alone.

John Major, the British prime minister, fought hard for his euro opt-out during the Maastricht Treaty negotiations in 1991. Denmark, too, got an opt-out after a second referendum on the treaty.

But Poland and Hungary did not, nor did Sweden and the Czech Republic. These four countries chose not to participate. One of the biggest mistakes the EU made in its hasty dash for enlargement in the early 2000s was not to insist that member states prepare for euro membership later. Poland was admitted to the EU even though its own constitution prohibits the country from adopting the euro.

It is now repeating the same mistake. The December EU summit gave the go-ahead for membership negotiations with Ukraine. Euro membership has not even been considered in those discussions, just as it was not given due consideration 20 years ago. With Ukraine as a member, the EU would land itself with another Hungary and Poland. After the experience the EU has had with those two countries, the last thing it would want is another member that sees the union as a club of sovereign states.

The euro has given rise to another category of division: within the eurozone itself. In 2015, Greece toyed with Grexit for a short while, but pulled back from the brink, even though Alexis Tsipras, the Greek leader at the time, had secured a mandate to leave in a referendum. Three years later, a newly elected populist Italian government was considering a parallel currency, and even made preparations.

The Netherlands could become a more serious source of disruption. Geert Wilders, the leader of the far-right Party for Freedom, won November’s election by a landslide but has yet to form a coalition. He is very likely to become the next Dutch prime minister. In the past, Wilders, too, has called for a Dutch EU and euro exit.

In the 1990s the great British-German political scientist Ralf Dahrendorf predicted that the euro would become a source of political division in Europe. I did not see it then. But he has been proved right.

Contrary to what I expected, the euro has turned out to be a cause of economic divergence between a prosperous north and a poor south. The eurozone’s banking system is today more fragmented than it was 25 years ago. France and Italy have been running persistently higher budget deficits than Germany over long periods. One of the many political consequences of economic and fiscal divergence is a growing reluctance by Germans in particular to agree to joint debt instruments, or even joint debt-financed programmes like the recovery fund when Covid hit.

As divergence begets divergence, the window for a fiscal union has now closed. A single banking system, a single capital market, a single government bond together would have been a prerequisite for Padoa-Schioppa’s dream of a geopolitical EU. Not insisting on this was a political choice. Fair enough, but those who support that choice have no right to complain that the EU lacks geopolitical power. How could it be otherwise?

And yet, there is no shortage of talk about geopolitics in the EU right now – especially from people who were never keen on a fiscal union. Before you can have a single European army, you need a single European defence procurement policy, and the funding that goes with it. The EU would need to be able to deploy its currency as a foreign policy tool just as the US does with the dollar. One would also have to abandon the idea that EU countries, several of which are smaller in population than some English counties, should enjoy full veto rights in foreign policy.

Throughout the euro’s first 25 years, I have supported a European fiscal union. I now accept that this won’t happen in my lifetime. Nor will the EU realise its geopolitical ambitions. The continuing delusion of the European policy debate has been that you can achieve one without the other.