The euro is a currency without a state nor economic policy institutions to ensure budgetary discipline and economic convergence amongst its members and protect them from large idiosyncratic shocks.
As it were, convergence was badly wanting amongst the 12 countries that adopted the euro in 1999 (ECB 2015b), not only in prices, wages and productivity, but also the quality of institutions (Boltho and Carlin 2012; cf. Chart 1). In the early years of the euro the single monetary policy generously accommodated divergent national policies (Micossi 2015), thus contributing to the build-up of unsustainable imbalances in peripheral countries.
When the financial crisis struck, the absence of risk sharing arrangements to cushion the shock brought the common currency close to breaking point. The poisonous cocktail of mistrust between the member states and lack of effective common instruments to meet the shock led not only to excessively tight monetary and fiscal policies, but to a meltdown of confidence that swell massively the real economic costs of the crisis. In the process, it has become apparent that the construction does not have an exit door – as once again confirmed by the unfolding Greek drama. Thus, the eurozone has evolved into a highly disfunctional marriage entailing much suffering and discontent among its participants (Wolf 2014), not easy to fix but neither to abandon.