Chapter 6: The Causes of Euro Instability
6.1 INTRODUCTION The euro was formally launched in January 1999, and at the time of writing (November 2000) its value against the dollar is substantially below its initial level. There has been a general decline through the period, with a low reached in May 2000, and a further, all-time low reached in September 2000. Figure 6.1 provides the details. The purpose of this chapter is to examine the causes of this general decline in the value of the euro. The various explanations proffered in the literature are assessed. In the light of this assessment, the future prospects of the euro and of, more broadly, the eurozone are drawn out. The introduction of the euro and the associated operation of the European Central Bank (ECB) has been under considerable scrutiny which is reflected in a relatively large number of scholarly papers providing a detailed assessment of the performance of the euro, the ECB and of the EMU macroeconomy more generally (for a recent example see OECD, 2000). Although our assessment draws on these papers in a critical manner, we provide further explanations consonant with the analyses of the previous chapters. Section 6.2 reviews the decline in the value of the euro. Section 6.3 examines two explanations, and argues that neither mere ‘bad luck’, nor fundamentals such as interest rate differentials or measures of long-run equilibrium magnitudes explain the decline. The next two sections attempt to construct a more satisfactory explanation. In Section 6.4 the argument, prevalent in the literature, that the...
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