The Deutschmark in Eastern Europe, black money, and the euro: on the size of the effect

Black money on the run as well as returning D-Mark stocks from Eastern Europe and Turkey can explain much of the euro's exchange-rate weakening. The portfolio balance model presented by Hans-Werner Sinn and Frank Westermann, in contrast to other related models, distinguishes between cash, securities and stocks in the international portfolios of capital investors. The model shows that the exchange rate is dependent on the demand for money in the narrow sense, i.e. M1 or M0, and not on M3 or other aggregates with interest-bearing papers. According to calculations, from 1997 to 2000 nearly 50 billion euro from Eastern Europe, Turkey and the stashes of black cash in the eleven euro countries could have flowed back. Transferring to the euro the results of an American study that shows that every billion of additionally sterilised dollar cash demand increases the dollar exchange rate by a half a cent, this would explain 25 cents of the 34 cents that the euro lost in the period 1997 to 2000. The downward pressure on the euro is likely to continue to the end of the year. After the introduction of euro cash in January and February 2002, this pressure will gradually disappear.