A Chatham House, Elcano and AREL Report

Associate Fellow, Global Economy and Finance
Federico Steinberg and Miguel Otero-Iglesias

This report examines why the economic and monetary union (EMU) was so badly affected by the global economic and financial crisis, and assesses whether further changes need to be made to the structure of economic governance that underpins it.

How to Fix the Euro: Strengthening Economic Governance in EuropePhoto by BamBamImages/iStock

The euro was launched 15 years ago through the Maastricht Treaty, and was expected to make Europe stronger economically and more integrated. Although the Delors report in 1989 correctly identified many of the structures needed to make EMU work, the Maastricht design underplayed the importance of labour and product flexibility, and of divergences in competitiveness. For most of its first decade the euro area grew quickly, coinciding with a period of very rapid world growth.

However, the global economic and financial crisis that started in 2007 hit Europe hard, exposing serious flaws in its original design. Although the crisis began in the United States, Europe ended up being the worst-affected region. At one point, markets and commentators began to ask serious questions about whether the single currency could survive.

Important measures were taken to save the euro, and since 2012 markets have become calmer, as European leaders and policy-makers signalled they were prepared to take tough decisions. In particular, the president of the European Central Bank (ECB), Mario Draghi, promised to do ‘whatever it takes’ to protect the euro.

This report examines why the economic and monetary union (EMU) was so badly affected by the crisis, and assesses whether further changes need to be made to the structure of economic governance that underpins it.