European Monetary Union and Exchange Rate Dynamics

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The establishment of the European Central Bank (ECB) and the Euro in 1999 marked a significant shift in Europe's economic landscape, introducing a novel central banking institution unlike past monetary unions. Initially benefiting from low inflation and economic growth, the Euro faced a dramatic decline in value, losing 15% within 16 months. This volatility raised concerns about its competitiveness against major currencies like the US dollar and prompted discussions on theoretical frameworks, contrasting portfolio models with purchasing power parity.