Summary

The exchange rate value of the EURO, though worrying, has to be seen in its wider historical context. Structural reforms, of which the Financial Services Action Plan is a central element, will generate the conditions for a strengthening of the EURO. So will the introduction of EURO notes and coins - the physical expression of the single currency.

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The EURO's history to date might be characterised by frustration of initial high hopes for both its strength and stability. Between its launch in January 1999 and its close on 30 June 2000, it has fallen by roughly 20 percent in nominal terms against the US dollar. This has produced a level of criticism aimed at the project of monetary union and, in particular, at the European Central Bank for failing to maintain the strength of the EURO.

Most analysts would agree that at its low point of 87 cents to the dollar, the euro was undervalued relative to the Eurozone's underlying economic fundamentals. By other measures, however, the new currency's track record should not be cause for alarm. First, the euro has traded well within its historic bands, which (using a synthetic euro prior to January 1999) have ranged between 0.70 and 1.50 against the dollar over the past 20 years.

Moreover, the focus on the nominal exchange rate has diverted attention from another important measure of the currency's stability. This is its internal stability as evidenced by the low level of inflation in the eurozone, which has remained below the ECB's target ceiling of two percent. Against this benchmark, the first 18 months of monetary union have been encouraging.