The desire to perfect political unions is rooted in the founding treaties. In the preamble to the US Constitution, the American people aspire to form a “more perfect” union. The 1957 Treaty of Rome, which established the European Community, stated the desire to create the foundations for an “ever closer” union between the peoples of Europe. The euro was established as part of this process of creating an ever closer union, in the hope that political dynamics would improve the economic structure and make the euro an ever more perfect monetary union. But has this been the case? Nobel Prize-winning economist Bob Mundell described an optimal monetary union as an economic unit composed of regions where economic shocks are symmetrical and between which labour and other factors of production flow freely. These conditions rarely exist in practice so there are more factors to consider in determining the health of a monetary union. For one, there are measures that can be taken to reduce the frequency of asymmetric shocks. For example, increasing the similarity of countries' economic structures, encouraging the openness of their economies and intraregional trade, and reducing their level of specialization of economies. On the other hand, adopting economic policies that facilitate the management of asymmetric shocks once they occur. For example, encouraging the mobility of production factors and the flexibility of prices and wages, or increasing the capacity of automatic stabilizers and the effectiveness of cyclical policies. The federal budget in the US is key to the stability of the US monetary area. In a certain sense, a monetary union is like a natural ecosystem, which must reach an optimal level of diversity that generates the necessary balance between resilience and efficiency. Therefore, the key to perfecting a monetary union is to create the necessary arsenal of economic policies to counteract its natural shortcomings. And a series of immediate questions arise: can a monetary area be optimal if it imposes a system of rules that neutralizes the main cyclical economic policy available at the national level, fiscal policy? Can a currency area be optimal if one of the largest countries adopts a strategy of persistent competitive devaluation that neutralises the adjustment efforts of other countries suffering asymmetric shocks? The history of the euro as a currency area can be divided into three phases. A first phase, initially successful, marked by convergence of interest rates and inflation, but which led to excessive exuberance in some countries and, eventually, to the euro crisis. A second phase of inefficient crisis management, due to a combination of divergent political interests and an erroneous diagnosis, which encouraged the adoption of excessively austere deflationary policies and increased economic divergence – worsening the quality of the currency area. And a third, much more successful phase of pandemic management, with economic policies that not only avoided divergence but also provided the monetary union with better cyclical management instruments, such as the NextGenerationEU fund, improving the quality of the monetary area. An interesting aspect of this history of the euro as a monetary area is that the adjustment mechanisms have been different from what was expected at the beginning. Labour mobility between countries has not been the main means of adjustment, as external migration flows have been much more decisive. Nor have price and wage devaluations – remember the obsession of European leaders, during the crisis, with divergences in unit labour costs – prevented by the persistent weakness of prices and wages in Germany. But, despite this, current account deficits have been transformed into surpluses. With historical perspective, it seems clear that the emphasis on price and wage competitiveness was excessive. Lessons for the future. Some of the mistakes made have had a permanent impact. For example, the management of the euro crisis, and the behaviour of some governments – such as the debate in Italy in 2018 on leaving the euro – has generated a persistent fragmentation of monetary policy in the eurozone that makes it difficult for the ECB's decisions to be transmitted to all countries equally. It is difficult to avoid economic divergence when some countries have, permanently, less favourable financial conditions than their neighbours. Membership of the euro must contribute to the progress of all its members, and economic divergence can quickly turn into political divergence. So the question is: is the euro of 2024 a more perfect monetary area than the euro of 1998? The answer is not obvious. The starting point of the euro in 1998 was complex, since it was born with two problems: the high Italian public debt compared to the rest, which generated mistrust and contributed to increasing the complexity and rigidity of the fiscal rules; and the lack of synchronicity of the German economic cycle, which made it difficult to manage the newly born common monetary policy. It also had a deflationary-biased monetary policy – remember that the inflation target was asymmetric, below 2% – and lacked fiscal stabilisation instruments. The starting point of the euro in 2024 is not without its difficulties either: it faces a greater diversity of fiscal positions – Italy’s debt-to-GDP ratio is around 140%, in the case of France and Spain it is just over 100%, while in Germany it is below 60% – and persistent German economic divergence. In addition, political fragmentation and the resurgence of economic nationalism are a headwind for the development of economic policy instruments that improve investment capacity and cyclical stabilisation. But the euro of 2024 has a much broader and more effective range of economic instruments than in 1998 – including the fact that the ECB has already accepted asset purchases, and even intervention in fixed-income markets, as economic policy instruments. Most of the intellectual and ideological blockages that prevented the completion of the arsenal of economic policy instruments have been overcome. The balance, as a whole, is positive. Will the euro continue to advance towards a “more perfect” monetary area? Progress is not guaranteed. The investment needs to face the geostrategic challenges are enormous and, as is being seen in many countries, the risk of institutional regression is high. If European countries become embroiled in their internal struggles as a zero-sum game, each one doing its own thing with the mentality of a small country, Europe will be left behind in the economic competition with the USA and China. The risk of a new economic divergence between the euro countries is high, something very dangerous in a political context of advancing political and economic nationalism. Let us not be overconfident, there is still a long way to go. Ángel Ubide on X: @angelubideFollow all the information on Economy and Business on Facebook and Twitter. Xor in our weekly newsletter