Euro Ironies
“Only through a national currency will each country retrieve its sovereignty over economic and currency policy. […] Germany must exit from the Eurosystem” (page 34, authors’ translation). Program of the Alternative for Germany party for the election of the 21st Bundestag, Party conference, January 11-12, 2025.
The founders of the euro hoped that people in all the member states of the European Union (EU) eventually would come to view the common currency as their own. This goal seemed especially difficult to achieve in Germany, where the national currency – the Deutsche Mark (DM) – served as an enviably stable European benchmark for decades. Indeed, in the hope that other currencies could inherit this stability, the European Monetary Union that preceded the euro was built on fixing other members’ currency values to the DM.
Remarkably, surveys suggest that more than 25 years later the euro’s founders’ hopes have been fulfilled: the common currency is at its height of popularity in Germany, where its support is stronger than elsewhere in the EU (see chart). In addition, the euro clearly inherited the DM’s stability, with annual inflation in the euro area averaging 2.1% since the currency’s inception in 1999, and the current real trade-weighted exchange rate only modestly below its norm during this period.
Support for the Euro (Percent of Respondents), 2005-2024
Yet, both economic and political developments make this popularity (and the euro’s stability) appear ironic. Again, this may be especially true for the largest EU country, Germany, with its deteriorating economic fundamentals. The country’s broadest measure of output, real gross domestic product, is nearly unchanged since 2019 (see chart). Yet, according to the latest IMF World Economic Outlook, the economy is operating only modestly below potential (with an output gap estimated at 1.1%), implying that Germany’s economic stagnation actually is close to its long-run trend rate of growth. And, strikingly, the weakest part of the economy appears to be industrial production: what had been Germany’s exceptional source of strength has plunged by 18% since peaking in 2018.
Germany: Real GDP and Industrial Production (Quarterly, 2015=100), 2015-2024
Sources: FRED (real GDP) and Bundesbank (industrial production excluding construction).
Second, Germany’s notable postwar political stability now faces serious challenge. Support for extreme parties – especially on the right – is rising sharply (see chart). The obvious question is why the center is so weak, and what this portends for the future. It is tempting to argue that these two developments – persistent economic decay and waning support for mainstream parties – are closely linked. Yet, other factors, such as immigration, may be driving current political preferences. For example, the latest Eurobarometer poll (November 2024) shows a surge in negative attitudes toward immigration coming from outside the EU. This helps us to understand the rise of populist anti-immigrant parties on both the far right (Alternative für Deutschland, AfD) and the far left (Bündnis Sahra Wagenknecht, BSW).
Share of Bundestag seats held by far left/right parties following elections (Percent), 1990-2025*
Notes and sources: Data through 2017 are from the German History in Documents and Images Project. Data for 2021 are from the Bundeswahlleiterin. Data for 2025 represent an average of five reported polls in the period from February 11 to February 14, rather than an average of seats in the Bundestag. The composition of far-left parties has changed over time; as of 2025, they include BSW and Die Linke. The only far-right party that entered the Bundestag during this period is the AfD, which was founded in 2013.
We find it notable that these problems have yet to weaken support for the euro. Perhaps, as the founders hoped, the currency is benefiting from a generational effect. After all, the physical euro came into being in 2002, so a significant fraction of today’s adult population never used the DM. Indeed, Germans are now accustomed to using the euro both at home and in travels to their most common foreign destinations. Most importantly, the public does not appear to associate the single currency with either Germany’s depressing economic performance or its political fragmentation.
At some point, however, a continuation of this toxic brew of economic stagnation and political extremism will surely pose a challenge for the euro, too. As Germany’s history in the 1930s teaches us, when an economy persistently fails to satisfy people’s needs, the political center erodes—sometimes rapidly. And, the resulting fragmentation makes it increasingly difficult to form a consensus for economic reforms that are essential to restoring prosperity.
The challenges of policy reform are evident: numerous recommendations for modernization – such as the proposal to expand infrastructure outlays of Germany’s Council of Economic Experts (Sachverständigenrat) – require a stable policy consensus over an extended period to ensure efficient implementation. Any reform also requires a willingness to exploit available policy capacity. Yet, the Constitutional rules – namely, the “debt brake” (Schuldenbremse) – that already limit Germany’s fiscal flexibility could become even more binding as the political center weakens.
Against this background, the parliamentary election on 23 February could be one of the most important since the origin of the Federal Republic in 1949—not only for Germany, but for all of Europe. Unsurprisingly, Germany faces an unprecedented surge in economic policy uncertainty (see, for example, here). Everything seems to be up in the air. Aside from economic policies, this includes fundamental security policy and the future of NATO, relations with Russia (generally favored by the extremists), and the 75-year partnership with the United States (long a fundamental pillar of the mainstream parties).
What do the latest polls suggest? As in recent elections, the Christian Democrats probably will remain the leading party, with about 30 percent of the vote. However, the far-right AfD is likely to receive about 20 percent of the vote, making it the second-largest party in the Bundestag for the first time. A key source of uncertainty is which, if any, of the smaller parties will surpass the 5-percent threshold necessary to gain seats in the Bundestag. Currently, both far-left parties (BSW and Die Linke) are close to the threshold, as is the centrist Free Democratic Party (FDP) that was part of the recent ruling coalition (with the SPD and Greens). In this highly fractured environment, a small swing could result in a very different composition of the next Bundestag.
Indeed, if both far-left parties exceed 5 percent in the popular vote, while the FDP falls short, extremists could combine for more than one-third of the Bundestag seats. That threshold is crucial because it affects fiscal capacity: enacting various proposals to reform the “debt brake” requires a two-thirds majority. While the debt brake rules currently provide business cycle flexibility, they probably would not allow for a surge in infrastructure outlays without unprecedented cuts elsewhere. Nor would they allow a jump in defense outlays in the absence of an official government-declared “emergency” that would be subject to review by the Constitutional Court. (It is far from clear that the Court would regard a withdrawal of U.S. security support for Ukraine as an “emergency” even if a majority of the Bundestag did.)
Finally, the stunning rise of the AfD – possibly aided in recent weeks by several violent attacks in German cities (see, for example, here, here and here) – poses a challenge to the euro. As we note in the opening quote, the AfD stands in opposition to the euro. By comparison, other far-right parties in Europe generally have either pulled back from openly advocating the restoration of national currencies (such as Le Pen’s “Rassemblement National” in France), or have never sought to replace the euro (like Meloni’s Fratelli d’Italia).
To sum up, the founders of the euro would be delighted to see how popular the common currency has become a quarter century on. But they would be no less disheartened by the economic and political developments that keep their singular achievement fragile.