Helmut Kohl brushed aside all arguments against the single currency. President Chirac invited me to the Elysee Palace to hear the virtues of monetary union. Seventeen years later, the question is whether their successors will have the vision to dismantle their monumental mistake, now a prime cause of unemployment, stagnation and populist fury. 

Those of us who were sceptical of the euro argued that a monetary union would inevitably require a political union, centralising decisions about tax and public spending, and that we didn’t want to be part of that.

While we were right about that, we actually underestimated the problem – the euro has become so damaging and divisive that public opinion within it will not tolerate a political union. So not only was the cart put before the horse, but the horse will not now contemplate even following the cart at a distance.

The second respect in which the euro has exceeded our worst fears is that it has made some countries, like Italy and Greece, poorer while others get richer.

We always maintained that forcing many countries to have the same interest rates and exchange rate would be a problem: some would have booms followed by big busts, as has happened in Ireland, Portugal and Spain. The enthusiasts told us that this would be temporary and “convergence” of all the members would follow. 

Again we sceptics were right. But we could have gone further. Not only are eurozone economies not converging, they are conspicuously diverging. The per capita income of Italians is lower now than in 2000, which is why they are – not surprisingly – getting increasingly restive. In the meantime, the German economy has kept on growing, and the average German is about 20 per cent better off over the same period.

Why is this? Because the euro is a cheaper currency than Germany would have if it still had the deutschmark, while it is more expensive than Italy would have if it still used the lira. Germans therefore keep exporting easily and running up a surplus, while the Italians struggle and go deeper in to debt.

Furthermore, the freedom of movement of capital in Europe probably makes this worse – why would you put your euros in an Italian bank when you can invest them in Germany?

Membership of the euro has thus put the Italians on a permanent path to being poorer. Unless Mr Renzi was going to enact such extraordinarily bold reforms as to raise the productivity of Italian workers to the same level as their German counterparts, there was nothing he could do to stop this.

His defeat has not made the eventual break-up of the euro more certain, because that is coming anyway. It has simply made it more obvious.

Leaving the euro, however, is a far more difficult problem than leaving the EU. As everyone now knows, Article 50 provides for leaving the latter. It may be a vague and inadequate rule, on which our Supreme Court is now deliberating at length, but it is nevertheless a rule that provides for getting out.

The eurozone has no such rule. This is a burning building you are never meant to leave. What is more, you are barricaded in. If you contemplate leaving, you have to face not having any notes and coins of your own; the need to default on debts that will be even bigger when your new currency goes down in value; and the collapse of your banks because being in the eurozone means they were able to borrow money they should never have been lent. 

Tens of millions of people in southern Europe will increasingly find that they cannot tolerate staying in the euro, but nor can they leave it without great cost.

Their anger and resentment will only intensify. The question now is whether Europe’s leaders will cling to a project that has failed even more spectacularly than its critics imagined, or have the statesmanship to provide a way out for those who conclude they have to go.

The euro is going to need a financial Article 50 – a way of providing for exit, which shares the costs of leaving and gives international help to those departing a scheme they should never have joined. Of course, the mere admission that such thinking is necessary would damage confidence in the single currency.

It would mean going back on the dream of the 1990s. That is why no one in authority in the eurozone will want to admit that they need to invent an orderly exit. It is anathema to them – the collapse of their beliefs. But those who have trapped entire countries in a vast, failed experiment have a responsibility to help them get out.

David Fuller's view

In the long, sad history of bad ideas, one of the worst was the creation of a single currency without having first created a fiscal union with a central government.  This should have been able to smooth out differences in economic growth and development, with more prosperous states subsidising weaker ones via the transfer of capital and developmental projects. 

Anyone with a basic understanding of economic history knew this, and many said so, often repeatedly.  However, Germany and France did not want a fiscal union of very different nations, with long and often rivalrous histories in the post-WWII environment.  Similarly, there was little support for a superstate of Europe among the various European populations.  It was, however, a political ambition of many European leaders. 

Europe’s best idea during the recovery following WWII was the creation of the European Common Market.  What could be better than an economic zone in which citizens of the new European democracies were able to travel and trade freely with each other? It worked well in terms of GDP growth and a reassuring harmony among the region’s populations.  It also had the blessings of other democracies around the world, but it was not a global power. 

Convergence first started to go wrong in the exchange rate mechanism (ERM) introduced in 1979, misguidedly intended to reduce currency swings and create monetary stability in Europe.  ERMs will reduce currency differentials but at the cost of growth in less competitive economies which are required to keep their currencies within specified boundaries and no longer have the freedom to devalue.  This was made tighter when it became the European Currency Unit (ECU) in 1995.

The introduction of the euro in 1999 has been a disaster for all but Germany, as most people now know.  The EU has consistently underperformed economically and the unemployment levels in Southern European Countries are obscene.  The headline above describes Italy as a poor country.  Yes, it is today but Italy was quite prosperous prior to the European ERM, the ECU and now the Euro.

The important question today, emphasised by William Hague above, is whether the EU’s leaders from Germany, France and the unelected Brussels bureaucracy have the statesmanship to assist Italy and any other countries which wish to leave the Euro, to do so without suffering unnecessarily punitive damages.    

(Please note: I emboldened a paragraph in the portion of William Hague’s article above.)

Here is a PDF of William Hague’s article.

(See Also: It’s time Blair, Major and Clegg spared us their patronising guff on Brexit, by Allison Pearson of The Telegraph)