8.6 Monetary union in Europe

was no reason to believe that the new currency would behave in the same way as

this weighted average had done before 1999. Indeed, it was likely that recessions in

the major economies would have a more depressing impact on expectations about the

future of the European economy than was suggested by the weights applied in the

old exchange rate mechanism of the European Monetary System.

Thus, the fall in the value of the euro resulted from a mixture of genuine eco-

nomic news, the existence of uncertainty about the attitudes of the authorities

and a variety of short-term political factors. The doubts about when the euro would

‘bottom out’ encouraged speculators to continue to sell the euro.

By September 2000, the ECB had become concerned about the possible ina-

tionary effects of the weakening currency. After a series of interest rate rises, the

ECB joined with the central banks of the US, Japan and the UK to purchase euros in

an attempt to prop up the currency. This, together with a further interest rate rise

in October, had no immediate effect and the euro reached its low point against the

dollar on 26 October 2000. Then, however, the value of the currency did begin,

slowly and haltingly, to rise. This was probably largely to do with increasing concerns

about the US economy. Having reached $0.9525 in January 2001, the euro began

2002 at $0.9034. From June 2002, it began to climb fairly steadily, nishing the year

just below $1.05. Aided by concerns about the impact of the US-led war in Iraq

and by regular cuts in US interest rates the euro continued to rise, charging past its

starting dollar value to reach $1.36 by the end of 2004. It then steadied and began

to fall back towards its starting level, which it again fell below for a time in late 2005.

At the end of March 2006 the value of the euro was just over $1.21, only a little

different from its value at the beginning of 1999. Much the same applies to the value

of the euro in terms of sterling. From a beginning exchange rate at the start of 1999

of a1 £0.716, the euro had moved to a1 £0.695 by the end of March 2006, a fall

in the value of the euro of approximately 3 per cent over seven years.

The steep fall in the value of the euro in its rst two years had led critics to brand

the single currency a failure, but recent events conrm that much which happens

in the rough and tumble of daily currency trading relates to the market’s view of

the US economy and to short-term political and economic events rather than to

economic fundamentals. The success or otherwise of the European single currency

will have to wait until a judgement can be made about its impact on the European

economy as a whole and on the economies of member countries, not be made on

the basis uctuations in the market for foreign currency.