National Tamers versus Global Tigers
Chapter 11: A safety net for the euro (2000)
The circumstances in which the major countries would want to use intervention to attempt to inﬂuence exchange rates are relatively rare, but they do arise from time to time, and one would need to ask, ‘if not now, when?’ Michael Mussa (IMF 2000b, p. 336) During 2000 the downward trend of the euro exchange rate, already apparent in the new European currency’s ﬁrst year of life, became even more pronounced. In addition to the economic factors already mentioned in Chapter 5, the euro’s performance began to be aﬀected by the scepticism of market participants about the ability of the European monetary authority, the ECB, to counteract the declining exchange rate through monetary policy alone. Despite the fact that as early as November 1999 the ECB had begun to pursue a more restrictive monetary policy to prevent inﬂation from rising above 2 per cent, gradually increasing the main reﬁnancing rate from 2.50 to 4.75 per cent in October 2000, the market believed that further monetary tightening aimed at supporting the exchange rate was unlikely. Inﬂationary tensions appeared to derive essentially from factors external to the euro area and were blamed primarily on a rise in oil prices. Yet the weakening of the euro exchange rate was itself a factor, as it induced capital outﬂows from Europe to the United States where investors were attracted by better proﬁt prospects in the stock market and private sector. On this last point, there was broad consensus...
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