The Euro: Reflections on the first three years

In the first three years of its (virtual) existence, the euro has seen a general decline in its value (notably against the dollar). In this paper we look at this issue and reflect on the implications of the decline for the future of the euro.The paper begins by briefly reviewing some of the explanations that have been put forward for the weakness of the euro, which might be seen as temporary factors or factors that do not arise from the creation of the eurozone per se. These explanations include the decline in the value of the euro as being a reaction to previous rises, interest rate differentials as favouring the dollar and the decline in the euro as being the obverse of a rise in the value of the dollar reflecting the strength of the US economy. These explanations are found to be unconvincing, and the view is advanced that there are serious weaknesses within the eurozone itself and in the construction of the eurosystem, along with its operation, that could be undermining the value of the euro. The divergent euro area may be one of the more significant factors contributing to the euro decline.