The common currency that was intended to unite Europe's bickering countries and carry them forward to prosperity has had precisely the opposite effect.
Now, as Greece lurches toward an unprecedented exit from the currency club, the euro project looks fragile. Its design flaws are glaring, its shortcomings are obvious.
The threat of "Grexit" demonstrates that a country's entry into the currency zone is not necessarily the irrevocable marriage that the euro's founders envisioned. If Greece topples out of the currency zone, speculators may start eyeing other heavily indebted countries on Europe's periphery for signs that they too are considering an exit.
"The euro can no longer be regarded as a 'single currency,'" Frances Coppola, a widely followed British commentator on banking, wrote in her Forbes blog. "It has been revealed for what it really is, a system of hard currency pegs between 19 – or perhaps now 18 – sovereign countries. And a system of hard currency pegs is fragile. The risk that the euro zone will unravel is substantially increased."
At the heart of the issue is the jury-rigged nature of the euro's design. It has always been more a political crusade, designed to support a united Europe, rather than a carefully thought-out economic program.
Back in 1997, the founding members of the euro zone laid the foundation for a common currency by agreeing to the Stability and Growth Pact, which insisted that every country that wanted to join the bloc had to keep their annual deficits under 3 per cent of gross domestic product and their public debt below 60 per cent of GDP. The strict guidelines were intended to ensure that no member could undermine the common currency with out-of-control spending. Based upon that understanding, the euro was introduced in two stages, in 1999 and 2002.
But the Stability and Growth Pact was always a joke, even in those early years. Italy and Belgium didn't meet the requirements but were admitted to the currency zone anyway after promising to do better. By 2003, Germany and France had exceeded the deficit limits, too, but invoked a special-circumstances clause to avoid the financial penalties that were supposed to be levied. Greece was widely suspected of faking its numbers but was never forced to improve its official statistics.
The lack of any true enforcement mechanism was just part of the problem with euro zone architecture. Europe has never been what economists call an "optimum currency area."
For one thing, Europe's national economies are wildly disparate, meaning it's next to impossible for the European Central Bank to forge a single interest-rate policy that's appropriate for them all.
In addition, labour mobility is limited, at least by North American standards. A worker in Nova Scotia can easily move to Ontario or Alberta in search of a better job, but different languages, laws and customs make it harder for European workers to perform similar migrations. As long ago as 1991, economists such as Barry Eichengreen of the University of California were warning that Europe did not fit the classic criteria for an optimum currency area.
The practical problems have only grown since the euro was introduced. So long as each country had its own currency, it could always regain lost competitiveness by devaluing its money. But once locked into the euro, laggard countries could only adjust by slowly, painfully grinding down their wages and costs. That is precisely the ordeal that countries such as Greece, Spain and Portugal are now enduring.
To make matters worse, the euro zone makes little provision for rich countries to channel money to poor ones. While fiscal transfers in Canada and the United States mean better-off provinces and states help out less fortunate ones, that doesn't happen among countries in Europe.
Given the tortuous process of forging an agreement among so many countries, it's unlikely that the euro zone's architecture is going to be revised any time soon. But Prof. Eichengreen, who has been studying the European currency project for decades, argues that those who predict an imminent unravelling of the euro zone are probably mistaken, at least if self-interest prevails.
He says the leaders of other countries will look at the chaos in Greece and think twice about an exit of their own, given the cost of the bank run that would inevitably result. "The authorities would be forced to shutter the financial system," he wrote in a blog post. "Economic activity would grind to a halt."
Of course, that's assuming policy-makers act rationally. Prof. Eichengreen says he has been shocked by the extent of political incompetence on both sides during the current crisis, and vows not to be surprised again. "Never underestimate the ability of politicians to do the wrong thing," he says.