First, inflation. The first 20 years of the euro’s existence were fundamentally deflationary. The globalisation of supply chains, aging societies, a glut of savings, and new web-based technologies, came together to push prices down everywhere.
It was very hard to create even modest inflation even if you tried. This decade is going to be very different. In Germany, prices are already rising at 5.2pc annually, and are set to go higher. Inflation has hit 6.7pc in Spain, and it is already running at 4.9pc across the zone as a whole.
Those are all among the highest rates since the euro was launched, and they are likely to be sustained. Here is the important point. It is rising prices, not falling or stable ones, that kill off monetary unions.
Just take a look at the post-war Bretton Woods system, which fell apart during the inflationary 1970s, or the European Monetary System, the precursor to the euro, which collapsed amid the inflation of the early 1990s. When prices are surging, citizens start to lose faith, and investors want to find a way out – and that quickly becomes very dangerous for the entire system.
Next, look at the sheer scale at which money is being printed. For the past 20 years, the ECB has been the most conservative of the major central banks. It was well behind the curve on quantitative easing, or near-zero interest rates, maintaining a stern monetary orthodoxy whilst others experimented.
That was often bad for the economy – after the financial crisis of 2008 for example – but it was good for credibility. That is now about to change, and dramatically so. In the United States, the Federal Reserve is starting to wind up QE and raise rates.
The Bank of England has already begun normalising policy. By contrast, the ECB is now locked into printing vast quantities of money every month, and can’t stop without triggering a collapse of the system. It worked fine when everyone was doing it. When it’s just the eurozone? It is going to be a lot harder.
Finally, borrowing is surging. A decade ago, there was a debt crisis in the periphery. But Greece, Ireland and Portugal were all containable. Next time around, it will spread to the core. Italian debt is going off the charts, up to 154pc of GDP, with a massive wager underway that government spending on a vast scale can finally kick-start growth.
France has edged ahead in the total amount it owes, and is now the third-largest debtor in the world behind only Japan and the US (and unlike Italy it mostly borrows abroad).
The EU has now joined in, with its own borrowing to fund its €750bn coronavirus recovery fund, although it has conveniently not got around to putting in place any taxes to pay the money back. In reality, the zone is riding a wave of borrowed money.
And yet debt in what is, in effect, a foreign currency, has always been a recipe for disaster. The eurozone is building a mountain of it – and there is no reason to think it is exempt from that law of finance.
In truth, 20 years is hardly a long time for a monetary system. Bretton Wood lasted from the end of the Second World War to the start of the 1970s. The gold standard in various forms for decades.
The Latin Monetary Union staggered on from the 1860s until the First World War. Just because the euro has lasted for two decades now we should not complacently assume it is going to be around forever. Indeed, its twenties will be its most perilous decade yet.
