The euro fell to a new 14-month low Friday, just under $1.25, on fears of public unrest in the euro zone and on growing concern over the credibility of the European Central Bank.
The euro was recently down at $1.2457 from $1.2531 in New York late Thursday, according to EBS. The single currency was also down against the yen, at ¥115.47 from ¥116.13.
Although both Spain and Portugal have now announced austerity measures to help reduce their budget deficits, the moves have failed to boost confidence in the euro as investors now worry about the threat of civil strife in these countries, as well as in Greece. Spain's largest trade union has already called for the public sector to go on strike over the austerity measures.
Analysts are also mulling the consequences of the ECB's decision last weekend to start buying sovereign bonds in an effort to boost market liquidity and prevent contagion from Greece's debt crisis. There is rising concern that the central bank has compromised its independence as well as skewed pricing in euro zone bonds, which is now determined more by the ECB than by the open market.
"The ECB exposes itself to potential conflicts and is thus damaging the euro," said Ulrich Leuchtmann, head of currency strategy with Commerzbank in Frankfurt.
The euro did manage to stage a small bounce early in the day, largely on profit-taking but this quickly disappeared as the single currency was sold back down to its new low at $1.2471.
The dollar, meanwhile, fell against the yen to ¥92.49 from ¥92.68, but was up against the Swiss franc at 1.1225 francs from 1.1178 francs. And the pound fell to $1.4563 from $1.4614.
The U.K. currency came into the firing line as the EU made it clear that it will go ahead with hedge-fund regulation despite objections from the U.K. This, along with plans for the U.K.'s own banking regulations, could prove damaging to London's position as a financial center.
Sterling has been under selling pressure for most of this week, hurt both by the political uncertainty surrounding the country's new coalition government and by concern that proposed spending cuts won't be enough to reduce the country's budget deficit fast enough to avoid a credit downgrade.
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Friday, May 14, 2010
EU, under threat, shows new urgency in crisis
After weeks of failing to resolve Greece's debt problems, the EU agreed its part in a $1-trillion rescue fund for euro zone countries early on Monday, and Spain and Portugal have bitten the bullet since then by announcing austerity plans.
The unveiling of European Commission proposals for tighter budget discipline has also shown Europe is at last getting to grips with a crisis which German Chancellor Angela Merkel says is an "existential test" for the euro zone and the 27-nation EU.
"There is still a long way to go. We have opened the gate. Now we have yet to go through it," said Ulrike Guerot, an analyst at the European Council on Foreign Relations think-tank.
"The crisis has shown us we need to animate moves toward closer political union as well as monetary union and we need a quantitative jump. The EU has used crises in the past to make that kind of jump and this is what is needed now."
The big leap may have been agreement on a "Special Purpose Vehicle" with funds of 440 billion euros to provide loans for euro zone states and an extra 60 billion euros set aside for countries with balance of payments problems.
For the first time in the crisis, the EU appears to be getting ahead of the curve and has the support of the International Monetary Fund and the European Central Bank.
It has bought itself some time to tackle long-term challenges, but needs to use that time well.
"They've reached a very impressive and significant agreement that gives them some respite, some time," said Uri Dadush, head of the International Economics Program at the Carnegie Endowment for International Peace in Washington.
But he added: "The real decisions needed to deal with Europe's crisis have to be taken in Portugal, Spain and Italy. They won't get anywhere without going through enormous pain."
NEW
Policy announcements this week by two vulnerable countries in the 16-state euro zone pointed to the new sense of urgency in the EU, which represents 500 million people.
Spain announced measures on Wednesday including 5 percent reductions in civil service pay and job cuts, and Portugal drew up steps on Thursday to reduce its budget deficit, including 5 percent pay cuts for top public sector staff and politicians. Greece had earlier announced its own austerity plans.
The moves reflect the understanding that hit many EU leaders last week that matters had got out of control and the future of the euro zone was at stake because of financial markets that Sweden's finance minister likened to "wolfpacks".
"We were totally unprepared for what was happening. It was clear by the end of the week that we had to act," one senior EU official said of the EU's decision to change tack.
The European Commission, the EU executive, showed its determination to avert more crises by announcing proposals on Wednesday to toughen sanctions against states that miss fiscal targets and to assess national budgets before parliaments.
Some of these proposals ruffle feathers in France and Germany but Paris and Berlin signaled they went in the right direction.
This could be the fuel injection needed to put Europe on course toward closer political and economic union, the goal that drove its founding fathers and leaders a generation ago such as Germany's Helmut Kohl, France's Francois Mitterrand and former European Commission President Jacques Delors.
But plenty of tensions lie ahead because France favors tighter economic governance, or more central control, and Germany resists this. Without the two biggest economies and most powerful political forces on board, EU policies rarely work.
"The crisis has generated a fiscal consolidation consensus in Europe. And there will be mechanisms to enforce fiscal reforms. In broad terms this consensus will hold in for the rest of 2010," said Keat Preston of the Eurasia research group.
"But there will also be serious tensions, particularly in the intermediate term. At the strategic level, Germany and France still have fundamentally different views about how to manage the tradeoffs between inflation and growth and this will continue to inform their approaches to fiscal reform."
LONG-TERM CHALLENGES REMAIN
An important challenge is restoring economic growth, now running at about one percent annually and expected to grow more slowly than the United States and emerging economies such as China in the next few years.
Despite the time created for countries to turn around their economies, they have probably only 18 months to meet or at least come close to meeting targets they have announced to cut their budget deficits and may face tough obstacles.
A group of elder statesmen said in a report on May 8 that strong political will, solidarity and leadership were needed to enable the EU to reform rather than decline.
This is going to be hard with leaders under pressure from voters to go easy on some of the tough medicine that is needed to tackle labor reform, economic imbalances between strong and weaker states, demographic changes that will reduce the taxpayer base and an over-dependence on Russia for energy.
A report by former EU Competition Commissioner Mario Monti called for concessions by all sides to protect the EU's single market for free movement of people, goods, services and capital which is the cornerstone of EU prosperity.
"This is the last chance to still be relevant in the world," said Hans Martens, chief executive of the European Policy Center think-tank in Brussels. "It's clear to everyone that Europe is becoming marginalized."
For all the signs of a more united approach after weeks of divisions and weak leadership, the EU has a long way to go.
"Europe faces a critical choice between greater integration and disintegration," Simon Tilford, chief economist at the Center for European Reform think-tank, wrote this week.
"Unless the reality is brought into line with the rhetoric, the euro zone will unravel."north face
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The unveiling of European Commission proposals for tighter budget discipline has also shown Europe is at last getting to grips with a crisis which German Chancellor Angela Merkel says is an "existential test" for the euro zone and the 27-nation EU.
"There is still a long way to go. We have opened the gate. Now we have yet to go through it," said Ulrike Guerot, an analyst at the European Council on Foreign Relations think-tank.
"The crisis has shown us we need to animate moves toward closer political union as well as monetary union and we need a quantitative jump. The EU has used crises in the past to make that kind of jump and this is what is needed now."
The big leap may have been agreement on a "Special Purpose Vehicle" with funds of 440 billion euros to provide loans for euro zone states and an extra 60 billion euros set aside for countries with balance of payments problems.
For the first time in the crisis, the EU appears to be getting ahead of the curve and has the support of the International Monetary Fund and the European Central Bank.
It has bought itself some time to tackle long-term challenges, but needs to use that time well.
"They've reached a very impressive and significant agreement that gives them some respite, some time," said Uri Dadush, head of the International Economics Program at the Carnegie Endowment for International Peace in Washington.
But he added: "The real decisions needed to deal with Europe's crisis have to be taken in Portugal, Spain and Italy. They won't get anywhere without going through enormous pain."
NEW
Policy announcements this week by two vulnerable countries in the 16-state euro zone pointed to the new sense of urgency in the EU, which represents 500 million people.
Spain announced measures on Wednesday including 5 percent reductions in civil service pay and job cuts, and Portugal drew up steps on Thursday to reduce its budget deficit, including 5 percent pay cuts for top public sector staff and politicians. Greece had earlier announced its own austerity plans.
The moves reflect the understanding that hit many EU leaders last week that matters had got out of control and the future of the euro zone was at stake because of financial markets that Sweden's finance minister likened to "wolfpacks".
"We were totally unprepared for what was happening. It was clear by the end of the week that we had to act," one senior EU official said of the EU's decision to change tack.
The European Commission, the EU executive, showed its determination to avert more crises by announcing proposals on Wednesday to toughen sanctions against states that miss fiscal targets and to assess national budgets before parliaments.
Some of these proposals ruffle feathers in France and Germany but Paris and Berlin signaled they went in the right direction.
This could be the fuel injection needed to put Europe on course toward closer political and economic union, the goal that drove its founding fathers and leaders a generation ago such as Germany's Helmut Kohl, France's Francois Mitterrand and former European Commission President Jacques Delors.
But plenty of tensions lie ahead because France favors tighter economic governance, or more central control, and Germany resists this. Without the two biggest economies and most powerful political forces on board, EU policies rarely work.
"The crisis has generated a fiscal consolidation consensus in Europe. And there will be mechanisms to enforce fiscal reforms. In broad terms this consensus will hold in for the rest of 2010," said Keat Preston of the Eurasia research group.
"But there will also be serious tensions, particularly in the intermediate term. At the strategic level, Germany and France still have fundamentally different views about how to manage the tradeoffs between inflation and growth and this will continue to inform their approaches to fiscal reform."
LONG-TERM CHALLENGES REMAIN
An important challenge is restoring economic growth, now running at about one percent annually and expected to grow more slowly than the United States and emerging economies such as China in the next few years.
Despite the time created for countries to turn around their economies, they have probably only 18 months to meet or at least come close to meeting targets they have announced to cut their budget deficits and may face tough obstacles.
A group of elder statesmen said in a report on May 8 that strong political will, solidarity and leadership were needed to enable the EU to reform rather than decline.
This is going to be hard with leaders under pressure from voters to go easy on some of the tough medicine that is needed to tackle labor reform, economic imbalances between strong and weaker states, demographic changes that will reduce the taxpayer base and an over-dependence on Russia for energy.
A report by former EU Competition Commissioner Mario Monti called for concessions by all sides to protect the EU's single market for free movement of people, goods, services and capital which is the cornerstone of EU prosperity.
"This is the last chance to still be relevant in the world," said Hans Martens, chief executive of the European Policy Center think-tank in Brussels. "It's clear to everyone that Europe is becoming marginalized."
For all the signs of a more united approach after weeks of divisions and weak leadership, the EU has a long way to go.
"Europe faces a critical choice between greater integration and disintegration," Simon Tilford, chief economist at the Center for European Reform think-tank, wrote this week.
"Unless the reality is brought into line with the rhetoric, the euro zone will unravel."north face
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Men's Spyder Jackets
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