The European project of economic and political unification started out with the Treaty of Rome in March 1957 establishing the European Economic Community (EEC) and the European Atomic Energy Community (EAEC or Euratom).

There were six founding member countries (Belgium, France, Germany, Italy, Luxembourg and the Netherlands). They wanted to revive their war-ravaged economies through free trade and coordinated economic and energy policies.

Political scientists like to point out that this was also an important peace project to make another European (i.e. French German) war impossible.

That’s when Europe’s long march began. By 1968 most of the customs union was completed. But the Europeans soon realized that they built an external trade wall without a customs union. Italian trucks carrying agricultural products were hijacked, and their contents violently spilled out, because the French farmers’ unions claimed that a devalued lira gave Italians an unfair trade advantage.

So, the Europeans ended up without a genuine customs union because currency fluctuations were technically equivalent to export subsidies and import tariffs.

The European monetary union is a major accomplishment

A quick and effective solution to that problem was an irrevocable locking – with no margins of fluctuation -- of customs union’s currencies. That would have created a monetary and a customs union with relatively minor – and probably temporary – inefficiencies.

Europeans, however, were not ready for such a step. France could not accept the German central bank as a de facto European monetary authority.

They embarked instead on a thirty-year slog of narrowing their exchange rate differences. What followed was a tough period of financial crises trying to follow German economic and monetary policies.

Finally, the common currency, the euro, came in on January 1, 1999, as an accounting unit and a means of electronic payments, with coins and banknotes introduced in 12 countries on January 1, 2002.

Europe got a Frankfurt-based European Central Bank (ECB) to manage a new legal tender, and an E.U. treaty made the ECB a uniquely independent supranational institution, free from any political interference, with a policy mandate to maintain price stability.

On current evidence, the ECB has done a reasonably good job in executing that mandate. The headline inflation in 21 countries of the euro area last month was reported at 2 percent, even though the core inflation (consumer prices less energy) stood at 2.4 percent. Two important problem areas were a 4.2 percent price increase of unprocessed food and a 3.4 percent increase of service sector prices.

The euro will survive return to nation states

The ECB’s policy record is vulnerable to energy price increases caused by looming Middle East conflicts and Europe’s reinforced sanctions on Russia’s energy supplies. Indeed, the reason why the core inflation was relatively restrained in December is owed to a 2 percent decline in energy prices.

With food and service sector prices rising at a fast pace, an acceleration of energy price inflation would be a very serious problem for the ECB because credit tightening would push stagnating economies in Germany, France and Italy – two thirds of the euro area GDP – into a recession.

Only Germany would have some space for a modest fiscal stimulus. And even that is questionable for an unpopular center-right government that is steadily losing ground to far-right opponents. The latest opinion survey shows that the ruling Christian and Social Democrats are polling at 24 percent while Alternative for Germany (AfD) would get 27 percent of popular vote.

The situation is much worse in France. The government cannot pass this year’s budget in the parliament, and the president’s approval rating is down to a record low 11 percent.

The Italian government is more stable, but with public debt at 138 percent of GDP there is no room for a fiscal stimulus to offset an eventual monetary tightening in an economy at the edge of recession with a growth rate of 0.6 percent in the first nine months of 2025.

This difficult euro area economic situation is raising legitimate concerns that a precarious political outlook in France and Germany could create problems for the monetary union.

Markets don’t see it that way. The euro’s trade-weighted index over the last twelve months has risen 13 percent, and the share of euro-denominated global currency reserves has risen to 20.3 percent. That’s the only rising major segment of world reserves.

The new political forces likely to take power in France and Germany will not dismantle the monetary union. They understand that the euro is a precious mechanism of economic stability.

But the European conservatives will go back to the union of nation states. They will probably claw back some transfers of national sovereignty to European Commission and will curb Commission’s interference in member countries’ sovereign domains.