E.U. faces tough questions as euro continues to slide
Tuesday, May 18, 2010
LONDON -- The once-mighty euro, which briefly plunged to a four-year low against the dollar on Monday, may be doomed to keep falling whether or not European leaders can contain the region's roiling debt crisis.
The euro clawed back from a deep spiral in Asian trading Monday, closing down 0.2 percent at 1.239 against the dollar. But after its slide of almost 4 percent against the greenback over the past week, analysts say the euro's continued fall over the coming months may be inevitable given the economic turmoil gripping the region.
Assuming there is no full-blown run, the decline may not be all that bad for Europe -- a weaker currency, after all, would make German BMWs and Spanish wines cheaper overseas, heightening demand. By the same token, a surging dollar would make U.S. products less competitive.
For Europe, the real danger is yet to come. If the euro's fall accelerates, investors could begin to question the viability of what was considered the world's most ambitious monetary experiment when it was introduced 11 years ago. There could even be pressure to eject members of the 16-country eurozone if they cannot get their finances in order, although there is currently no mechanism to do so.
"There are still no guarantees the euro can pull through intact from this crisis," said Jane Foley, research director at Forex.com in London. "No matter how this goes, the euro is likely to suffer looking ahead."
The euro's fall was prompted by fears that the problems currently faced by Greece, with its mounting debt, will spread to other nations in the region, including Spain and Portugal. To ease those fears and prop up the euro, the European Union last week created a $1 trillion fund to help governments cope with their massive budget shortfalls and avoid defaults on obligations to investors. In addition, the European Central Bank agreed to buy up the debt of nations in crisis; it said Monday that it had already scooped up $20 billion worth of debt since last week.
Still, the rescue plan is contingent on Greece and other nations slashing government spending. Doing so might help them close their budget gaps, but it will probably slow economic growth and increase unemployment.
With Europe already expected to see only minimal growth this year, some analysts fear that new cuts could push the region back into recession, triggering a continued fall in the euro.
Conversely, if nations in crisis fail to make painful cuts -- giving into public pressure and labor unions -- the euro's fall could be even worse. Nations including Greece would likely be forced into defaulting with investors, pounding the already troubled banks and pension funds, particularly in Germany and France, that hold much of their debt. The fallout could spark another banking crisis like the one seen after the collapse of Lehman Brothers in late 2008, but this time centered in Europe.
"The euro is caught between a rock and a hard place at the moment, and it is hard to see how it can extract itself from this uncomfortable position in the near term at least," said Howard Archer, chief European economist for IHS Global Insight in London.
A currency's value is a reflection of the strength and credibility of the country -- or, in the euro's case, countries -- that use it. One of the currency's biggest problems remains the vast imbalances within the eurozone, which includes economic powerhouses like Germany and minnows like Greece.
German Chancellor Angela Merkel on Sunday conceded that the $1 trillion fund had only bought the region time to harmonize those differences, particularly when it comes to government deficits. Germany is pressing its neighbors to adopt balanced budget laws similar to one, passed last year, that set a firm cap on its national deficit.
Yet narrowing transnational differences won't be easy, in part because there is broad dispute over the E.U.'s ability to implement fiscal limits. Last week, after the E.U. executive body suggested that governments submit their national budgets for review -- before handing them over to their own legislatures -- several leading French political figures immediately protested that such a procedure would be unconstitutional. Politicians from other European countries voiced similar complaints, in effect killing the suggestion before it got off the ground.
There is a silver lining to the euro's decline. One of the biggest problems for countries such as Greece and Spain is the relative strength of the euro compared with their now-defunct national currencies -- a gap that has made their exports far less competitive. As the euro drops in value, particularly against the dollar and the Japanese yen, Greek cheeses and Spanish olive oils are becoming more cost-competitive exports.
"I think the bigger story is that the euro hasn't fallen more than it has given the kind of pressure it has come under," said Jakob von Weizsäcker, a fellow at Bruegel, a Brussels-based economic think tank. "This drop could actually help with the adjustment process that Europe needs to go through, and make the region healthier in the long run."
Correspondent Edward Cody in Paris contributed to this report.