The foundations for the euro were set 20 years ago this week. But I fear that the project would not survive any new crisis

This week marks the 20th anniversary of the start of EMU--the European Economic and Monetary Union.

Although the physical currency was not introduced for a further three years, the whole basis on which Irish and indeed European economic and monetary management operates, changed profoundly on January 1 in 1999.

The ECB took control of interest rate setting for the 12 countries that formed the initial club. Currency devaluation disappeared as a tool of economic policymaking.

Setting a single interest rate for a very diverse group of economies was always going to be a significant challenge.

Fiscal discipline has been sadly lacking in many countries, with Ireland in the run-up to 2007 and Italy at the moment, the most compelling examples of gross mismanagement.

What might make economic and financial sense, very often does not make political sense. To make the EMU project more successful, more fiscal and political integration is required, but there is little appetite for this across the EU.

After the start of EMU, the ECB pursued a very low-interest rate policy appropriate to economic conditions in the large economies in France, Germany, and Italy.

For Ireland, the very low-interest rates were totally inappropriate for an economy that was on fire. The fires were further stoked by tax cuts and very strong growth in current government expenditure.

The result was an economy that became seriously overheated as the Irish political system failed badly. Anyone with a memory of the 1977 Fianna Fáil election manifesto would not have been surprised.

I fear not a lot has subsequently changed, but perhaps I am far too cynical about the Irish political process.

As crises erupted throughout the eurozone from 2007, Ireland, Spain, Portugal, Cyprus, and Greece were caught in the headlights.

The structures of EMU were not solid and only for the political will to keep the project together at all costs, the euro project could very easily have blown up.

The famous remarks by the then incoming ECB president Mario Draghi he would do whatever it takes to keep the project alive were instrumental in saving the eurozone.

It is far from clear that sufficient reform has occurred for the project to cope with the next crisis.

EMU was ultimately a victory for politics over economics, and unfortunately, this is still the main characteristic of the whole project.

However, economics will eventually win out. For Irish policymakers, it is essential that fiscal policy is as conservative and prudent as possible.

More on this topic

Tide turns for euro as eurozone economy looks set to pick up

May's Brexit request drags sterling lower on fears of British political fallout

Ship taken back from migrants after Med hijack arrives in Malta

Shares and euro fall as EU warns of ‘substantial’ risks

More in this Section

Cork firm Zenith Technologies bought by US tech giant Cognizant

Huawei laptops return to Microsoft online store

Apple’s Tim Cook criticises other tech firms for data breaches

MyTaxi to trial cab-sharing feature in Dublin

More by this author

Government unlikely to heed sage external advice

For business, no win-win as Irish consumers push back against price increases

Elections show voters happier than thought

Basically, buyers can't afford homes based on how much money they can borrow


Double act: Why talking to your baby is essential

Ask a counsellor: ‘My mother’s become so high maintenance since moving closer – what should I do?’

Victoria Pendleton on veganism and why she thinks everyone should eat less meat

As Mean Girls turns 15, these are all the mid-Noughties fashion trends we hope never return

More From The Irish Examiner