The short answer is: I believe, it will not.
On the eve of the euro's introduction on January 01, 2001, the British newspaper, The Guardian, wrote:
"If the euro is to prove successful, history suggests that political ramifications will be significant."
Quotes from the British economist Dr. Gerard Lyons on the subject are also enlightening:
"The European Monetary Union (EMU) will need to become a political union to survive. This is one of the lessons from a historical analysis of monetary unions in the nineteenth and twentieth centuries. Monetary unions of large sovereign nations which do not have polical union eventually fail, sometimes after a long time."
"The lesson is that monetary unions of politically independent, large sovereign nations can fail, particiularly when there is an external shock, causing the economic environment to change. It is easier for unions to survive when the economic cycle is favorable."
Well, you may argue, the Brits have always been biased against the euro. They are just sore losers, hankering for the days of glorly when the British pound ruled world trade.
That could be so, but I believe they have got their facts right about monetary unions.
Indeed, things seemed to be moving merrily along until the economic environment took a sharp turn for the worse towards the end of the EMU's first decade. When one looks at the European Monetary Union in the aggregate, it does indeed look pretty good. With a joint GDP of around 18 trillion dollars, it runs a positive current account balance of about 1%. Look a little closer, however, and you will discover some serious structural fault lines which have been there all along but conveniently overlooked, only to crack wide open during the economic and financial crisis which ensued.
To wit, while Germany runs a current account surplus of some 210 billion dollars, France, Italy and Spain, in the aggregate, run a deficit of around 110 billion dollars. Nested within a full political union - like for example the United States of America - there would be no problem. But the prospects of a United States of Europe have never been further off the political map than after the recent elections to the European parliament.
While Germany lectures its EMU partners to get their act together, it refuses to share the spoils from its own benefits of the euro. Just imagine where the exchange rate of the German mark would have been today, not the least in relation to where the French franc, the Italian lira and the Spanish peseta would have been. The mutual current account pictures would have looked a lot different, and banks would not be lending money in abandon to the weaker currency nations without a hefty interest premium tacked on,
Now that the damage has been done, it is simply impossible for the large sovereign deficit nations to get their house in order without being releasted from the shackles of the euro.
Sooner or later, the EMU will be history.
