Why was European economic performance relatively weak, even before the euro was formed? Until recently, the EU’s biggest venture, and its most colossal waste of money, was the Common Agricultural Policy, which inflated prices for food and incentivised farmers to overproduce, thereby leading to wine lakes, butter mountains and the rest. At a lesser level, the EU squandered money on ill-considered subsidies and pet schemes. Moreover, it overregulated and misregulated, especially in the labour market.

This tendency to make daft economic decisions has deep roots. If you are trying to harmonise institutions and practices across extremely diverse countries, then you are driven inexorably towards heavy intervention and regulation. That has substantial economic costs.

Moreover, the EU is an enterprise conceived by politicians and administered by lawyers. These two groups have a proven tendency to fall foul of the law of unintended consequences. They make rules which are supposed to bring benefit without taking due account of the effects. Their inclination is to believe that behaviour is driven by rules. By contrast, economists know that it is driven by incentives. Furthermore, France has had a disproportionate role in framing the EU. The French establishment is famously suspicious of markets and disdainful of competition. It is not surprising, therefore, that the EU has had an anti-market bias.

Even so, the most serious source of economic underperformance has been the euro. It isn’t only about the pain inflicted on the southern countries by uncompetitiveness and fiscal austerity, but also about the persistent tendency for Germany to run huge current account surpluses which drain demand from the other euro members – and countries outside the eurozone.

This tendency was there before the euro was formed, but it was kept in check by changes in exchange rates. Not any more. Out of this inflexible union has come economic misery – and not only for the eurozone. Its weak performance has been a leading factor restraining many other countries, including the UK.

Ironically, it was not necessary to form a monetary union. And if there was to be one, it wasn’t necessary to include countries such as Greece and Italy, with widely differing economic cultures as well as problems with competitiveness. If monetary union were to go ahead, the euro elites were warned by countless economists that this could not last without fiscal and political union. Monetary union was an integration too far and too fast.

So why did they do it? It was the politics, stupid. Monetary union was in line with the ambition for “ever-closer union”, and with the objective of creating an integrated EU in which nation states fall back and common European institutions surge forward.

David Fuller's view

The section in bold above speaks volumes in terms of the EU’s inefficiencies.  I doubt this will change because the people in charge are unlikely to accept responsibility for the EU’s economic failures. 

Regarding the concluding point above, this has been discussed since the Euro’s launch on 1 January 1999.  My view is unchanged.  They launched the Euro on its own because this was far less controversial than trying to create a Federal Europe, which would have had little public support.  Europe has subsequently been paying the price for the folly of a single currency without federal backing.  The better idea, in my opinion, would have been to stay with the European Free Trade Association (EFTA) and the European Economic Area (EEA).