The Causes of Euro Instability

Jerome Levy Economics Institute Working Paper No. 324

15 Pages Posted: 22 Mar 2001

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Iris Biefang-Frisancho Mariscal

University of the West of England (UWE) - School of Economics

Andrew Brown

University of East London

Malcolm C. Sawyer

Levy Economics Institute

Date Written: March 2001

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 a 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

Arestis, Philip and Biefang-Frisancho Mariscal, Iris and Brown, Andrew and Sawyer, Malcolm C., The Causes of Euro Instability (March 2001). Jerome Levy Economics Institute Working Paper No. 324. Available at SSRN: https://ssrn.com/abstract=264295 or http://dx.doi.org/10.2139/ssrn.264295

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Iris Biefang-Frisancho Mariscal

University of the West of England (UWE) - School of Economics ( email )

Bristol, BS16 1QY
United Kingdom

Andrew Brown

University of East London

Longbridge Road
Dagenham, Essex, RM8 2AS
United Kingdom

Malcolm C. Sawyer

Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States
845-758-7700 (Phone)
845-758-1149 (Fax)

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