The Mystery of the Weak Euro.(Brief Article)

The euro is a mystery for economists. As soon as it was introduced on Jan. 1, 1999, the euro swung downward and it has remained stagnant ever since, raising concerns about its prospects for success. Perhaps we should not worry too much: after all, in the past the dollar, the mark and the yen have swung widely against each other, with only moderate impact on national inflation, employment and growth. Yet our sense of intellectual frustration is at a peak.

What's going on with the euro? The available evidence does not support most conventional explanations for its stubborn weakness, including relative changes in interest rates or inflation. The thesis of a link between the strength of the dollar and the boom on Wall Street has been undercut by the drop in American stocks over the past year. And that leaves economists casting about for new explanations.

One popular answer is that the euro is weak because it currently exists only as a virtual currency. Taken literally, this answer implies that the exchange rate will rebound as soon as the actual euro notes and coins are introduced in January, or soon after. It may take a little extra time, the argument goes, perhaps due to some obscure psychological mechanism that restrains people from embracing a new currency. By virtue of its physical existence, however, the euro will eventually win over the market.

This explanation has a certain logic, but don't bet on it. The euro is not as virtual as the story implies. Many European markets are already operating in euros. Buying and selling stocks quoted in euros is commonplace. Besides, in our daily transactions, we hardly use cash anyway. Plastic rules. My credit- and debit-card bills are already denominated in lire and euros, and I surely wish I could pay them in "virtual" currency. No, the euro is all too real.

Another fashionable explanation for the euro mystery also relates to its supposedly "virtual" nature, and goes as follows: the euro changeover next year is a serious concern to criminals and tax evaders who want to keep loads of cash invisible to European authorities. And dodging the rules against money laundering can be quite costly when huge sums must be converted quickly. So, why not buy dollars slowly instead? It is widely believed that this consideration has created a ...