Between faith in that process and treaty provisions — ultimately unenforceable — dealing with public debt, the risks of a half-complete currency union were judged to be manageable.
Except the convergence never occurred. Incomes did rise steadily in Greece — a trend cited in the euro’s early years as an example of convergence at work and a sign of the euro’s success. But they were rising for the wrong reasons, as the government added employees and raised public salaries and easy credit fueled a consumer spending binge.
The common monetary policy set by the European Central Bank meant low interest rates across the board, quick integration of the region’s financial system — and an excess of borrowing in countries that did not deploy the money effectively.
“We all got sold on the ‘convergence trade,’ ” said Carl Weinberg, chief economist at the High Frequency Economics consulting firm. “In Europe, everyone got convinced there was one government and they would all stand behind each other. . . . When Greece stood up in the spring of 2010 and said ‘We are in trouble’ and everyone said ‘Go fish,’ the convergence trade was busted.”
As an example of what was expected to happen, foreign investment flowing into Eastern Europe from Germany, China and elsewhere has driven down unit labor costs and raised productivity in Poland, the Czech Republic and other nations that were relative backwaters when the euro was being debated.
In hindsight, Eastern Europe held some natural advantages. It was undergoing a full-on economic transformation from Soviet-style central planning to market capitalism and began the process with much lower wage levels than southern Europe. It was a blank slate when it came to labor rules and other regulations that manufacturers complain about in Greece, in Spain and elsewhere in the euro zone.
The European politicians trying to hold the currency union together now face the question of whether they can do so without the political and economic compromises involved in a fuller type of economic federalism, with countries surrendering sovereignty in return for broader burden sharing.
Some steps are already in the works. The region is expected to adopt new banking rules that will centralize financial oversight and deposit insurance. That will allow the regulation and risks of the euro-zone financial system to be spread across all of its members instead of leaving each country to stand on its own, a situation that sank Ireland and which is threatening Spain. More central control of government budgets is also being developed.
But even that may not be enough. Analysts note that regions sharing a currency almost always have ways to transfer money from richer to poorer areas and that workers move easily to higher-employment or higher-wage regions.
Some American states, for example, routinely generate less in federal taxes than their residents receive in Medicare, Social Security or other benefits, but because the federal system is so entrenched, that does not provoke controversy. The United States also has seen several waves of job-related migration — gold rushes, oil booms, the rise of tech centers such as Silicon Valley — of a sort unusual in Europe, where cultural and linguistic barriers still loom large even if borders are legally open.
Unless nations such as Greece, Portugal, Spain and Italy find a path back to growth, both types of transfers may be needed for the currency union to survive.