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The Causes of Euro Instability

  • Philip Arestis

    (South Bank University London)

  • Iris Biefang- Frisancho Mariscal

    (South Bank University London)

  • Andrew Brown

    (University of East London)

  • Malcolm Sawyer

    (Leeds University)

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 literatureCthat the decline in value of the euro is due to AU.S. strength@ rather than to any inherent difficulties with its impositionCis 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.

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File URL: http://128.118.178.162/eps/mac/papers/0103/0103005.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0103005.

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Length: 37 pages
Date of creation: 21 Mar 2001
Date of revision:
Handle: RePEc:wpa:wuwpma:0103005
Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 37; figures: included
Contact details of provider: Web page: http://128.118.178.162

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  1. Chinn, Menzie David, 2000. "The empirical determinants of the Euro: Short and long run perspectives," SFB 373 Discussion Papers 2000,43, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
  3. Giancarlo Corsetti & Paolo Pesenti, 1999. "Stability, Asymmetry, and Discontinuity: The Launch of European Monetary Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 295-372.
  4. Feldstein, Martin, 2000. "The European Central Bank and the Euro: The First Year," Journal of Policy Modeling, Elsevier, vol. 22(3), pages 345-354, May.
  5. Angeloni, Ignazio & Dedola, Luca, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 0004, European Central Bank.
  6. Kaldor, Nicholas, 1972. "The Irrelevance of Equilibrium Economics," Economic Journal, Royal Economic Society, vol. 82(328), pages 1237-55, December.
  7. Eichengreen, Barry, 2000. "The Euro One Year On," Journal of Policy Modeling, Elsevier, vol. 22(3), pages 355-368, May.
  8. Jonathan Coppel & Martine Durand & Ignazio Visco, 2000. "EMU, The Euro and The European Policy Mix," OECD Economics Department Working Papers 232, OECD Publishing.
  9. Feldstein, Martin, 2000. "The European Central Bank and the Euro: The First Year," Scholarly Articles 3043424, Harvard University Department of Economics.
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