Common Currency Woes: European Union Sees Threats to the Euro

Late last year, it became fashionable to predict the dollar's demise. This year, however, shaky state finances within the European common currency zone have many worried about the future of the euro. Even the EU thinks the monetary union could be in danger.

It wasn't all that long ago when pundits were predicting the downfall of the dollar. A quick glance at the US currency's exchange rate with the euro seemed to back up such fears. The euro cost over $1.50 at the beginning of December, and with the US government continuing to pump massive amounts of money into its economy, one can forgive casual observers for having assumed the trend might continue.

Just a month and a half later, however, the euro stands at $1.41 and many analysts are now warning that it may be in for a long slide. Some are even concerned that the cohesiveness of the euro zone might be endangered altogether -- with the European Union itself chief among the worry-warts.

According to an internal EU report produced by the Directorate General for Economic and Financial Affairs (DG ECFIN), which has been seen by SPIEGEL, the differing competitiveness among euro zone countries is "a cause of serious concern for the euro area as a whole."

'Endangers Cohesiveness'

The report, produced by the DG ECFIN for the European Commission on Economic and Financial Affairs, went on to voice concern that differences among euro zone countries "jeopardize confidence in the euro and threatens the cohesiveness of the euro area."

Financial turmoil in Greece is of particular concern, with the country running a public sector deficit of 12.7 percent in 2009, more than four times higher than the three percent target called for by European Union rules. But there are several other problem children within the 16-member euro zone, including Spain, Ireland and Portugal, with Italy also raising eyebrows.

Last week, bond markets indicated that investors are increasingly shunning offerings from Portugal, Spain and Ireland. Furthermore, strong fourth-quarter growth in the US coupled with a rather tepid recovery in Europe has many analysts predicting that the euro may slide to $1.30 by the end of this year.

'Speculation Is Abstruse'

Some also fear that struggling euro zone countries could be tempted to abandon the euro in order to gain back control over their interest and exchange rates. A Deutsche Bank report from late last week argued that "dissatisfaction with the single monetary policy could start to grow in the peripherals (eds. note: a reference to Greece , Portugal , Spain and Ireland) by the end of next year, making the prospect of exiting monetary unity more tempting," according to a story by the French newswire AFP.

Greek Finance Minster Georges Papaconstantinou denied that his country was either being forced out of the euro zone or considering such a departure itself. In an interview with the German daily Die Welt, Papaconstantinou said "speculation about an exit from the euro zone is abstruse. I categorically exclude that Greece will quit the euro zone."

Still, few are denying the difficult road ahead for Greece and other debt-laden countries in Europe. The EU analysts from DG ECFIN propose rapidly balanced budgets and economic reforms. In addition, the report says that salaries will have to reflect reduced productivity and a loss of competitiveness. "The measures will be accompanied by a noticeable rise in unemployment."

Still, the European Commission insists there is no alternative for struggling EU economies to getting their houses in order. The measures, the report says, are "of vital importance for the long-term functioning of the European monetary union."

cgh -- SPIEGEL/with wire reports

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