It all started so promisingly. Symphony orchestras, clinking champagne glasses and even a brief appreciation in value to celebrate the introduction of the euro just 22 short months ago. Europe seemed to be on the cusp of a new golden age. Now, we find ourselves in a position where the currency has lost 25 per cent of its value against the dollar, robust growth is still only a promise in the euro-zone economy and some brave souls are even questioning the future of the single currency project. The search for a culprit is on in earnest.

The ECB has taken a considerable amount of stick in its brief existence with the more disrespectful market and media elements making some unflattering suggestions about the competence of the organisation. Given the obvious talent and experience of the governing council, such remarks should be seen as little short of mischievous.

However, in terms of communicating with the financial markets, Frankfurt has not made life easy for itself with officials almost chastising the people who make their livelihood from valuing currencies. We have arrived at a Mexican stand-off where the markets blame the ECB for the euro's weakness while the central bankers imply that those untrustworthy and fickle trading types are deliberately undervaluing the currency and, in so doing, undermining the credibility of Economic and Monetary Union. While it is always tempting to point the finger at a bunch of individuals, plain and simple economic fundamentals are responsible for the currency's disappointing performance on the exchanges.

Why on earth would anyone want to sell dollars when the US economy is enjoying an almost unrivalled run of growth, reasonably low inflation and buoyant fiscal surpluses? Capital flows have also been working against the euro with the innovation of US industry, particularly in the fashionable IT sector, serving as a magnet for overseas investors.

Structural issues, effectively within the remit of politicians rather than central bankers, are important too with the flexibility of the US labour market allowing unemployment to hurtle to 3.9 per cent, a level last seen when Richard Nixon was in the White House, without generating undue wage pressures. There is a natural inclination on the part of most people to treat their own currency's value as a measure of national prestige. People in the euro zone are no different. To date, market participants and the general public seem to be relying on emotions rather than reason in reacting to foreign exchange developments with all effort and attention focused on the speed of the euro's dive rather than the economic implications.

Currency depreciations, when they are driven by economic fundamentals, should be regarded as a positive development. Without the fall against the dollar, the euro zone would not have enjoyed the impressive export performance which was largely responsible for the promising growth numbers emanating from the Continent earlier this year.

Given our read that the euro's weakness is due to less than impressive growth prospects, surely policy should be directed at reversing this situation. Of course, the ECB will rightly point out that its primary obligation is price stability and, with eurozone inflation standing at 2.3 per cent compared to 0.8 per cent in January 1999, its action on the policy front has some apparent justification.

However, the increase in inflation is not due to internal economic strength and will not respond readily to tighter monetary policy. While the euro's weakness must bear some of the blame, the bulk of the deterioration in price pressures has been due to higher oil prices. No matter how high the ECB forces interest rates, it will not have an impact on OPEC decision-making.

Now to the dilemma. The ECB is raising interest rates despite sluggish internal growth because it is worried about the inflationary consequences of further euro weakness. The bank seems to believe that forcing the interest rate differential with the US to contract will give the euro a new lease of life.

Meanwhile, the markets have identified the mechanistic approach of the ECB to rate setting and, rather than reacting to the narrowing of interest rate differentials, are more concerned at the implications for growth of tighter monetary policy. The bank raises interest rates, the markets forecast slower growth, the euro depreciates on the exchanges and the bank gets itchy on the policy front. It's all a bit of a vicious circle.

This circle must be destroyed if the euro-zone economy and currency are to reach their potential. Attempts at changing the foreign exchange landscape through G7 intervention have put a temporary floor under the currency but have not put the euro on a clear upward trajectory. Only sustainable, internally-driven growth can achieve that end.

It's time to ignore the machinations of the markets, signal clearly that policy is on hold and give the economy some uninterrupted time to generate real upward momentum. Escaping the policy bind involves little other than patience on the part of policy-makers. A long-term appreciation is, however, dependent on action by the political elite to address the structural deficiencies of the European economic model.

Colin Hunt is head of research at Goodbody Stockbrokers