Thirty years ago, when the setting-up of the euro was being discussed, the theory of optimal currency areas was at the heart of the debate. According to this theory, a monetary union needs participants with similar capabilities. However, the euro area was clearly not an optimal currency area. For many economists, the risk seemed far too high.
The politicians around Mitterrand and Kohl, who were adamant about the need for this currency union, were opposed to the economic theories and had their own hypothesis: The idea of convergence, the approximation of economic performance and the so-called "locomotive theory". According to this theory, a common set of rules should have the effect of forcing the unification of economic and financial policy in the newly created currency area and thus accelerate the integration of the participants. The euro was to relieve the weaker States of high interest payments and at the same time deploy the necessary pressure for reforms to that they would modernise their administrations and economic models. The weaker participants should be brought closer to the German level after the introduction of monetary union. In addition, it was always stressed that it should be an "upwards convergence", i.e. a process whereby the weak countries would catch up with the strong countries, rather than bring the latter down to their level.
This hope was quickly dashed. Although the euro initially brought the weaker countries lower interest rates, at the same time, it reduced the pressure for economic reform and led to the formation of bubbles.
When the euro crisis broke out, these countries had come to a political standstill with the low interest rates. It is true that all of them tried to put their economies back on track after the crisis. None of the weaker states in the South have truly succeeded in doing so. In the meantime, due to the different risk assessments, there are again interest rate differences vis-à-vis northern Europe and thus competitive disadvantages (see Chart 4).
The idea that the southern countries could catch up with the economically strong northern Europe through reforms has proved unrealistic In the meantime, the people have either voted out the savings policy, the hated "austerity" or forced the politicians to give up their reform ideas. In several cases, the reforms undertaken in Italy and Spain have already been reversed. The debt of the southern countries is rising rapidly even in relatively good times. The contractual obligations undertaken at the time of the introduction of the euro, or even in 2011 in relation to the "six-pack", are no longer being respected. The promises that politicians once made – stability, fiscal discipline and compliance with the convergence criteria – are no longer realistic today. Southern European countries are only kept afloat by hidden transfers and artificial low interest rates.
What is the political reaction? On the record, everyone claims to believe in convergence. It is the old and still the only official concept for overcoming the crisis. Economic convergence should ultimately create an "optimal currency area". This is the promise still officially being made to the citizens, but it seems that Brussels and Paris no longer believe in it:
They are working on the establishment of permanent financial transfers from Germany and other northern European countries (see The reform process). And yet, our politicians always claimed that this kind of convergence from above would never take place. This kind of convergence does not bring about an adjustment in the standard of living in line with that of the rich countries, but rather means that everyone meets somewhere in the middle.
Moreover, Paris keeps a tight control over who is appointed to the ECB and thus over the generous provision of fresh money to the bankrupt structures. Mario Draghi could be followed by another southern European as President of the ECB.
No matter how one views convergence, the EU is now inextricably linked to the euro system. It needs a functioning euro. Is there still any hope of achieving the original idea of convergence?
In the following we will examine whether this seems realistic – 27 years after Maastricht, 20 years after the introduction of the euro and 10 years after the beginning of the financial crisis. Particularly in times of crisis, particularly devastating for the EU countries in the South, European politicians conjure up the unity of the EU and the blessing of convergence and promote more integration, solidarity and centralisation. We will therefore compare the economic development of the four southern countries, France, Italy, Spain and Greece with the German economy since the euro crisis.
List of references for the used photos: