This paper analyses the issues raised by EMU for the relationships between the euro area and the international financial system. The depreciation of the euro exchange rate since the beginning of EMU has attracted most attention. We argue that theory and the data support none of the conventional explanations and that a substantial appreciation will be required to bring the rate to a sustainable long-run equilibrium. The paper discusses exchange-rate intervention and suggests that the authorities should take a more active policy stance. We assess the role of the euro as an international currency and the underlying developments in the capital markets and foreign exchange markets. We conclude with discussion of policies towards the international role of the euro, in areas such as: data needs; financial market developments; euroization; EMU and the international financial architecture; and the role of the Euro Group of finance ministers.

A revised version appeared as: 'The euro and the international financial system', pp. 334-356 of M Buti and A Sapir, eds., EMU and Economic Policy in Europe: The Challenge of the Early Years, Edward Elgar, 2002

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