ECB is jeopardizing the reputation of the euro

On May 2, 1998, the heads of state and government of the EU decided to introduce the euro, which in the long term was to become the common currency of the entire international community. Chancellor Helmut Kohl was well aware at the time that he was acting against the will of a broad majority of the population.

In an interview that became known later, he confirmed: “In one case (introduction of the euro) I was like a dictator.” However, he made this decision because he sees the euro as “a synonym for Europe” and a unique one in the common currency I see an opportunity for Europe to grow together peacefully.

The euro has always been more than a purely economic project. Many German economists and politicians associated this common currency with the hope that the countries of southern Europe in particular would recognize the usefulness of moderate wage agreements and solid state finances; because with the euro, interest and exchange rates as instruments of national economic policy ceased to exist, and labor costs remained an important parameter.

In contrast, a large number of the potential euro countries harbored the hope that the common currency would break Germany’s economic supremacy and the monetary dominance of the Deutsche Bundesbank.
At the beginning, the skeptical voices were numerous and weighty: A monetary union without a political union, which is primarily oriented towards the economically strongest member states, is doomed to failure – or, to put it in the words of Nobel Prize winner Paul Krugman: “The euro is a triumph of a symbol over substance. ”

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The then head of the US Federal Reserve, Alan Greenspan, predicted in 1997: “The euro will come, but it will not last.” In fact, when the euro crisis broke out in 2010, the idea cherished by Chancellor Kohl and his finance minister Theo Waigel was at the latest a “European Bundesbank” failed.

The ECB lost its original goal

In the summer of 2012, the then ECB President Mario Draghi promised that the central bank would hold the currency community together at all costs, “whatever it takes”.

At least part of this price has to be paid by the citizens of the euro zone. In the past decade, the ECB has learned how to use unconventional monetary policy measures to stimulate the economy, fuel the financial markets and protect states from financial imbalances. In return, however, it lost sight of its original goal – guaranteeing monetary stability – and instead embarked on the path of a rhetorical-semantic policy of target adjustment upwards.

At first, the ECB insisted that the high inflation was due to special effects that should quickly evaporate. When it could no longer be overlooked that this would not be the case, she emphasized that high price dynamics are only sustainable if they are backed up by stronger wage increases.

Despite rising inflation rates in all euro countries, the ECB leadership decided to leave the key interest rate unchanged in 2022. Reference was made to their new, self-imposed “symmetrical inflation target”, which also allows longer periods of inflation of more than two percent. For the ECB, it is now important to continue its monetary policy “patiently and persistently”, said central bank chief Christine Lagarde.

“It seems as if the ECB is displacing the risk that its inflation forecast could turn out to be too low”, was the understandable warning from ex-ECB chief economist Otmar Issing, who “the danger of a crisis of confidence with worrying effects on inflation expectations” sees.

The outgoing Bundesbank President Jens Weidmann agreed that the ECB should not commit itself to the currently very loose monetary policy line for too long. “We should not ignore the risk of excessive inflation and (…) remain vigilant.”

The author

Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the Advisory Council as well as an advisor to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at

The financial markets have already spoken their verdict. While the stock exchanges in Germany and other European countries reached new highs, the euro suffered an attack of weakness. This week the common currency’s rate against the dollar slipped below the 1.12 mark. Since the beginning of June, the euro has lost around ten cents against the US dollar.

One may argue about whether the harm of a clear devaluation outweighs the benefit or vice versa. Presumably, a representative of the Italian economy would judge this differently than the CEO of a German company. After all, it was common in the Deutsche Mark and Lira times for a country like Italy to stabilize the international competitiveness of its export economy through devaluations. The largely export-oriented German economy, on the other hand, was confronted with numerous revaluations, which made its products more expensive on the world markets, but drove the industry to continuously improve efficiency.

Euro suffers weakness

It is undisputed that the depreciation of the euro is currently accelerating inflation. The 4.1 percent inflation rate last reported by Eurostat in October is unlikely to be the end of the inflationary surge, which was not least imported. Energy and raw materials in particular are quoted in dollars on the world markets – even with constant quotations, importers have to pay more if their own currency devalues.

It is also undisputed that such a weakness counteracts all efforts of the past to establish the euro as the world currency. Which central bank will invest its reserves in a currency whose responsible central bank ignores unmistakable inflation signals?

In the spring of this year, Chancellor Angela Merkel (CDU), after an EU summit, noted with regret that the role of the euro had “not become stronger” over the past few years, and therefore demanded: “We must do everything we can to protect the euro as an important world currency without overbearing ourselves. ”At that time, ECB boss Lagarde also agreed to efforts to establish the euro as a world currency alongside the US dollar.

Because the advantages of a national currency that counts as world currency are obvious. The USA can exchange self-printed paper bills for any kind of goods and services from all over the world; only thanks to the hegemony of the dollar can they finance their gigantic trade and budget deficits. In addition, US companies do not take any exchange rate risk.

And with the Swift payment system, the American government has the most powerful non-military weapon at its disposal, as it can effectively decouple individual states from world trade. Since the Trump era at the latest, no one in the world should have any more doubts that the US could credibly threaten to use this weapon – as it did recently against Iran.

It would therefore not only be in the interests of the euro area and thus also of the German economy, but also in the interests of almost all economies integrated into world trade, if a currency policy counterweight to the dollar were to arise. At the same time, a euro accepted as a world currency would give the European association of medium-sized and small states a real global economic and thus also geopolitical weight, especially in relation to the superpowers USA and China.

However, belief in this scenario seems to be waning in the financial markets. Without a change in monetary policy, Europe threatens to become a geopolitical quantité négligeable. One can only hope that the philanthropist and speculator George Soros was wrong when he prophesied in 1999: “The euro is destined to be a weak currency.”

More: ECB director Schnabel warns of inflation risks

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