Emu and the External Value of the Euro

CEPR Working Paper No. 2058

Posted: 27 Apr 1999

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Maria Demertzis

Bruegel

Date Written: February 1999

Abstract

The size and economic relevance of Europe may imply a new role for the EURO in the international financial markets. But will the EURO compete with the $US and the Yen for a place in the basket of international currencies? Will that induce a bipolar or indeed tri-polar system, and with what consequences? Two important uncertainties arise from the fact that the long run trend of the EURO depends on the economic performance of the partner countries as well as on the properties of the new currency. They are: a) the international use of the EURO in trade, as well as its effect on the stability of the foreign exchange markets more generally, and b) the implementation of monetary and fiscal policies: how the new European policy mix will affect the degree of international policy co-ordination and exchange rate management. Much of this uncertainty is due to the fact that some of the effects will work in opposite directions and many will be felt gradually (primarily those that are dependent on private sector expectations), while others will become obvious as soon as the EURO is introduced. In this paper we discuss some of the reasons why the EURO might be strong or weak but more importantly why it may be volatile at least in the initial stages. Finally, we calculate the "synthetic" EURO and show how one EURO is not one ECU, an additional reason why it may prove volatile.

JEL Classification: F3, F4, G1

Suggested Citation

Hughes Hallett, Andrew J. and Demertzis, Maria, Emu and the External Value of the Euro (February 1999). CEPR Working Paper No. 2058. Available at SSRN: https://ssrn.com/abstract=155081

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 292 087 001 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-322-8539 (Phone)
615-343-8495 (Fax)

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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