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.
