EMU is off to a disappointing start. Five months in, all the doubts of euroskeptics - all the concerns they had about whether Europe was really suited for a single currency, or over whether that currency would be well managed - have been, if not exactly confirmed, at least shown to be well-grounded in reality. The most disturbing thing to me, however, is that the monetary leadership of the euro-zone seems to be worried about the wrong things; it seems as if they are confused about what the euro is for.

The biggest real concern about EMU before it got started was the issue of one-size-fits-all monetary policy. Given the lack of significant labor mobility within Europe, "asymmetric shocks" would create strains over the appropriate level of interest rates, and - if you believe that there is significant downward price stickiness - lead to a higher average unemployment rate than if countries could pursue monetary policy tailored to their individual interests. Euro advocates claimed that asymmetric shocks would rarely be an important issue, and that anyway European countries were too closely linked to achieve significant monetary autonomy even with floating exchange rates. Well, Germany's slump shows that the first claim was too optimistic; Britain's experience that European countries still can have their own monetary policies, and even use them fairly well.

The other, more contingent worry about EMU was that the new ECB would have a deflationary bias - that it would be so dedicated to building stable-price credibility, to proving itself more German than the Germans, that it would ignore concerns about growth and employment (and perhaps even flirt dangerously with a liquidity trap). Indeed.

But if one tries to parse recent statements by Messrs. Duisenberg, Tietmeyer, et. al., what seems to worry them most is not the real performance of the European economy, but the financial performance of the euro on external markets - its slumping foreign exchange value, and its progress or lack thereof as an international currency.

Why care about these things? Europe, like the United States, is a huge economy with relatively small external trade. It can and should adopt an attitude of benign neglect toward its exchange rate, letting monetary policy be focused on domestic (that is, pan-European) objectives. And while Europe may take pride in the role of the euro as an international currency, the economic payoffs to that role will be minor on any sensible estimate. (Europe will gain some seignorage when Russian gangsters start using 100-euro notes rather than $100 bills, and its financial markets will get a bit bigger and more efficient to the extent that international bond issues take place in euros rather than dollars. An optimistic estimate, by Helene Rey and Richard Portes, puts the sum of these gains at about 0.2 percent of GDP).

Yet European officials seem increasingly to talk as if these external indicators were their main concern - and in particular as if the dollar-euro exchange rate were a kind of test of their virility.

It now seems clear that among the strategic mistakes made by the euro's architects was that of introducing the new currency with a value close to, but slightly above, that of the dollar. This gives a parity of 1 a psychological salience that it does not deserve on any fundamental economic grounds, and makes it hard to conduct a rational monetary policy. On general principles (specifically, the standard theory of target zones), one can in fact assert that the euro is probably overvalued precisely because of that looming line in the sand: because markets suspect that the ECB will intervene or raise interest rates to keep the euro from falling below the dollar, they presumably believe that there is more room for the euro to rise than to fall - and this belief means that it is stronger than the fundamentals would otherwise warrant.

There have always been some Europeans who wanted the euro, not to make the continent's economy more efficient, but because they wanted to enhance European prestige and take America down a peg. But that wasn't the point of the project - was it?