Macroeconomics
The aim of the study
The study examines whether, more than 25 years after the introduction of the euro, the euro area constitutes an optimum currency area. This is important to ensure that the European Central Bank’s monetary policy can stabilise inflation and growth, rather than exacerbating potential imbalances.
The starting point is the theory of optimum currency areas developed by Robert Mundell. His theory assumes that a common monetary policy is only effective if economic structures and business cycles are similar. Alternatively, other adjustment mechanisms such as flexible labour markets, integrated capital markets and financial transfers must be available.
If, for example, the economic cycle in Germany and Spain follows the same pattern, then the ECB can lower interest rates during a recession to facilitate the recovery in both countries. If both countries are in a boom, the ECB can raise interest rates to curb inflation in both. However, if Germany is in crisis and Spain is in a boom, it cannot pursue a monetary policy that suits both countries.
The euro was not, and still is not, an optimum currency area
The euro area was not an optimum currency area at the outset and has not yet become one. Contrary to expectations, the introduction of the euro has not led to convergence among the euro area countries that would ensure that the ECB’s monetary policy has the same effect across all parts of the euro area.
The design of the monetary union is flawed: the member states of the euro area do not have a common fiscal and social policy that could balance out or cushion differing economic developments. EU regional policy is too limited in scope and lacks focus for this purpose. The missing willingness among European politicians to implement reforms has failed to make labour markets sufficiently flexible.
The elimination of exchange rate fluctuations has not led to synchronized business cycles through increased trade integration among euro area countries. Nor have integrated capital markets in the euro area contributed to convergence as hoped. On the contrary, in conjunction with uncoordinated fiscal policies, capital markets have contributed significantly to new imbalances and to the European financial and debt crisis.
The ECB and the EU must hold the eurozone together
Following the euro crisis extensive cohesion mechanisms had to be established to stabilise the euro: rescue funds (EFSF, EFSM, ESM), massive ECB bond purchases and longer-term refinancing operations, as well as the Eurosystem’s TARGET2 balances.
For some time now, debt-financed EU spending programmes such as the SURE labour market programme (€100 billion) and NextGenerationEU (€809 billion) have been evening out economic disparities within the euro area. Former crisis countries such as Spain and Italy have performed well as a result, but the core euro area countries, France and Germany, are faltering under the burden.
The creeping transformation into a liability and transfer union has negative effects on growth and distribution, contributing to political polarisation in Europe. From this perspective, a continuation of the euro rescue policies does not appear sustainable in the long term.
Scenarios for the long-term sustainability of the eurozone
A return to a strict focus on currency stability, as enshrined in the Maastricht Treaties, would require a more restrictive monetary policy and greater fiscal discipline at the national level and the level of the European Union. The advantage would be positive growth effects that would stabilise the euro politically and economically.
The completion of a political union with a common fiscal and social policy, including institutionalised regional fiscal equalisation within the EU, could alternatively ensure the long-term stability of the euro. This raises the question of how the relationship between EU fiscal policy and ECB monetary policy would be organized – whether it would be stability-oriented or involve a central bank dependent on the EU.
If neither option is politically feasible, an orderly division of the monetary union into a northern and a southern eurozone could reduce tensions. The resulting currency competition could generate productivity gains that might stabilise Europe economically and politically.
About the author
Gunther Schnabl heads the Flossbach von Storch Research Institute & is a professor at the University of Leipzig. He was an advisor at the European Central Bank and has conducted research at the Universities of Paris 1 Panthéon-Sorbonne, Stanford & Tokyo.
Legal notice
The information contained and opinions expressed in this document reflect the views of the author at the time of publication and are subject to change without prior notice. Forward-looking statements reflect the judgement and future expectations of the author. The opinions and expectations found in this document may differ from estimations found in other documents of Flossbach von Storch SE. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. This document does not constitute an offer to sell, purchase or subscribe to securities or other assets. The information and estimates contained herein do not constitute investment advice or any other form of recommendation. All information has been compiled with care. However, no guarantee is given as to the accuracy and completeness of information and no liability is accepted. Past performance is not a reliable indicator of future performance. All authorial rights and other rights, titles and claims (including copyrights, brands, patents, intellectual property rights and other rights) to, for and from all the information in this publication are subject, without restriction, to the applicable provisions and property rights of the registered owners. You do not acquire any rights to the contents. Copyright for contents created and published by Flossbach von Storch SE remains solely with Flossbach von Storch SE. Such content may not be reproduced or used in full or in part without the written approval of Flossbach von Storch SE.
Reprinting or making the content publicly available – in particular by including it in third-party websites – together with reproduction on data storage devices of any kind requires the prior written consent of Flossbach von Storch SE.
© 2026 Flossbach von Storch. All rights reserved.