The continuous appreciation of the Euro since the Fall of 2000 and the uncertainty surrounding its future course are obscuring the prospect for growth in Europe. When one looks in retrospect to the evolution of the euro (reconstituted from 1979), an important fact shows up: since the beginning of the nineties the evolution of the exchange rate has been procyclical . It is expected to continue to be so. Whatever the story one can devise to explain this phenomena, the main message of this paper remains: overreaction or not, the movements of the exchange rate of the dollar are prima facie contributing to the stabilisation of the American economy, but those of the exchange rate of the euro - whether bilateral or effective - are rather destabilising for the European economy. It is as if, absent an exchange rate policy of the euro area, the movements of the exchange rate of the euro are simply the reflection of the exchange rate policies of the rest of the world, and thus can't correspond generally to the needs of the European economy. If we look at some determinants of the movements of the (real) exchange rate - growth differentials, inflation differentials, long term interest rates differentials - it does not seem that they can explain very much, although interest rates differential may go a long way to explain at least qualitatively the direction of the change. Asset prices and bond yields did not evolve in such a way that one can infer that the appreciation of the euro was the consequence of capital inflows, and it was not. Investment in Europe, on the contrary, decreased in 2003. On all accounts - the appreciation of the euro, the pathological evolution of labour productivity, wage moderation and the deepening of the output gap - time has come for the ECB to cut the interest rate.
