Why was the euro weak? Markets and policies

Against all odds, the euro turned out to be a weak currency. We argue that this outcome can readily be explained by the policy-mix that was chosen at the onset of the period: tight fiscal policies following the convergence me chanism that was imposed by the Maastricht treaty and loose monetary policy that resulted from the convergence of interest rates to the lower point of the spectrum. We investigate this outcome empirically and show that the eu ro's weakness can be understood as the result of an excess supply in the zo ne, which is channelled abroad in the usual beggar my neighbor way. (C) 200 1 Elsevier Science B.V. All rights reserved.