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The Causes of Euro Instability

Author

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  • Philip Arestis
  • Iris Biefang-Frisancho Mariscal
  • Andrew Brown
  • Malcolm Sawyer

Abstract

This paper examines the causes of the general decline in the value of the euro by assessing the various explanations proffered in existing literature, then offering a more satisfactory explanation. The argument prevalent in the literature--that the decline in value of the euro is due to "U.S. strength" rather than to any inherent difficulties with its imposition--is viewed as somewhat undeveloped. We suggest that U.S. strength is an important but only partial factor in euro decline; the other side of U.S. strength is eurozone weakness. We review the (poor) performance of the ECB and assess the level of macroeconomic convergence of eurozone countries. We conclude that a combination of eurozone weakness, endogenous to the inception of the euro, and U.S. strength is the most plausible explanation for the euro's decline in value. We find that although the future value of the euro is uncertain, the prospects for the eurozone will remain bleak as long as the current institutions underpinning the euro, with their inherent tendencies to promote deflation, are in place.

Suggested Citation

  • Philip Arestis & Iris Biefang-Frisancho Mariscal & Andrew Brown & Malcolm Sawyer, 2001. "The Causes of Euro Instability," Economics Working Paper Archive wp_324, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_324
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    Cited by:

    1. Hein, Eckhard & Truger, Achim, 2002. "European Monetary Union: Nominal convergence, real divergence and slow growth? An investigation into the effects of changing macroeconomic policy institutions associated with monetary union," WSI Working Papers 107, The Institute of Economic and Social Research (WSI), Hans Böckler Foundation.
    2. Hein, Eckhard & Truger, Achim, 2005. "European Monetary Union: nominal convergence, real divergence and slow growth?," Structural Change and Economic Dynamics, Elsevier, vol. 16(1), pages 7-33, March.
    3. Eckhard Hein, 2002. "Monetary policy and wage bargaining in the EMU: restrictive ECB policies, high unemployment, nominal wage restraint and inflation above the target," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 55(222), pages 299-337.
    4. Alex Izurieta, 2001. "Can Countries under A Common Currency Conduct Their Own Fiscal Policies?," Macroeconomics 0108008, University Library of Munich, Germany.
    5. Gadea, Maria-Dolores & Montanes, Antonio & Reyes, Marcelo, 2004. "The European Union currencies and the US dollar: from post-Bretton-Woods to the Euro," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1109-1136.
    6. Philip Arestis & Andrew Brown & Kostas Mouratidis & Malcolm Sawyer, 2002. "The Euro: Reflections on the first three years," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 1-17.

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