ABSTRACT
Contrary to policymakers' ambitions for the euro, the widespread view among economists is that the new currency is likely to be less stable than its main national predecessors; see, for example, Kenen (1995), Alogoskoufis and Fortes (1997), Bergsten (1997), and Begg, Giavazzi and Wyplosz (1998). (There is less agreement whether the euro will be an inherently strong or weak currency.) A number of factors are expected to contribute to euro instability, principally: the large size and relatively closed nature of the euro area, which suggests that, ceteris paribus, exchange rate variations will have a smaller impact on participating economies than before EMU, and so will matter less to them; the emphasis, enshrined in the treaty, on internal price stability as the ECB's primary objective, which suggests that monetary policy will give little weight to exchange-rate stability; and the non-availability of national exchange-rate adjustment for buffering shocks which have differential effects on participants' economies, implying that a heavy onus for coping with shocks will fall on the euro interest rate, with uncomfortable consequences for the exchange rate. Subsuming all these arguments is the worry that, if and when the euro develops into a global currency, it will prove to be at least as unstable as the dollar and yen have been, and further polarization might add to those instabilities.
