Will the introduction of euro banknotes stabilise the currency?

Since its introduction on 1 January 1999, the euro has lost a quarter of its external value. Now that all attempts to explain the lingering weakness of the European currency on the basis of macroeconomic fundamentals have failed, the hypothesis that the weakness is due to the fact that the euro is only a virtual currency have gained credence. For this reason many analysts now hope that the introduction of euro banknotes and coins next year will make the euro more attractive and stabilise its external value. Peter Bofinger explains the euro's weakness in terms of behavioural finance theory. He argues that the euro in cash form will strengthen the currency but only after considerable delay. Renate Ohr stresses the psychological factors on the currency markets. Not until confidence is restored in the economic strength and stability of Euroland will a sustainable strengthening of the euro take place. For Michael Hüther, economic-policy reforms that hold out the realistic promise of economic growth are more important for the stabilising of the euro exchange rate than the circulation of the common currency. The undeniably low value of the euro is an indication for Wolfgang Filc that something is seriously wrong with the currency exchange markets. This can only be corrected by economic-policy cooperation and by strict rules. Franco Reither sees the euro weakness as the result of the lack of fiscal discipline, of homework that has not been done in the area of supply and regulatory policies, and the impending enlargement of the European Union. The monetary policy insecurity of the European Central Bank is an additional factor. The introduction of euro banknotes and coins will not change these basic facts.