Slide Continues Doubts Remain Despite Efforts to Shore Up Euro
Try as they might, European leaders have been unable to stop the euro's freefall this week. ECB head Jean-Claude Trichet insists that, despite the 750 billion euro package pushed through last weekend, the euro zone is not heading for inflation.
Europe had hoped that the crisis would be more or less over by now. After pledging 110 billion to Greece at the beginning of the month and a further 750 billion earlier this week should additional European Union countries run into sovereign debt trouble, EU leaders expected that the euro would stabilize and doubts about the common currency's longevity would dissipate.
As this week comes to an end, however, it is not at all clear that the measures are having the desired effect. On Thursday, the euro's value against the dollar dropped to a 14-month low of $1.2520. On Friday, the slide continued, with the euro costing just $1.2454 in midday trading. Indeed, despite the market euphoria that greeted the EU package earlier this week, it would seem that significant doubt remains about the long-term economic stability of the euro zone.
In an interview with the German business daily Handelsblatt on Friday, European Central Bank (ECB) head Jean-Claude Trichet sought to dispel those doubts. In particular, he confronted accusations that, by agreeing to allow the ECB to buy state bonds from euro-zone countries -- a move which many feel could result in inflation -- the bank was abandoning its focus on euro zone price stability.
"Price stability is our primary goal and it is a mandate that we have fulfilled in the last eleven-and-a-half years," Trichet said -- one of five times in the interview when he talked about the importance of controlling inflation. "We have not changed our course when it comes to monetary policy."
Strong Enough to Survive
Many have accused the ECB of "quantitative easing" -- pumping money into the economy -- which often precedes inflation. In the Handelsblatt interview, Trichet insisted that the ECB had policies in place to counterbalance the purchasing of state bonds. "The additional liquidity we provide the system by buying national bonds will be retrieved elsewhere," he said.
Trichet's comments were part of a larger message euro zone leaders have been at pains to deliver this week. The 15 members of the common currency area want to convince the markets that the common currency is strong enough to survive the sovereign debt crisis which has seen the euro plummet against the dollar in recent months and pushed Greece to the very brink of bankruptcy.
Austerity plans announced by Greece, Spain and Portugal have all been part of that message. Indeed, on Thursday, Portugal announced yet another round of austerity measures aimed at shrinking the country's budget deficit, which currently stands at 9.4 percent of gross domestic product, down to 7 percent by the end of this year. In addition to raising sales tax by a percentage point to 21 percent, the government of Prime Minister José Sócrates has introduced a "crisis tax" of between 1 and 1.5 percent on incomes and 2.5 percent on business profits.
Spain announced additional measures this week with Prime Minister Jose Luis Rodriguez Zapatero saying on Wednesday that civil servants' salaries would be cut by 5 percent this year and remain frozen through 2011.
The European Commission on Wednesday proposed rules that would see European Union member states submit their budgets to Brussels for approval prior to passage in national parliaments. The goal would be to prevent the kinds of budgetary difficulties currently faced by numerous EU countries, most notably Greece, Spain, Portugal, Italy and Ireland.
'Pretty Much Everything'
In his Friday interview, Trichet emphasized that major structural changes would have to be made if the euro is to survive in the long term. "In Europe, we need fundamental changes, and not just in the supervision of fiscal policies. Also in structural issues and competitiveness. We have to improve pretty much everything."
His comments echoed those made by Chancellor Angela Merkel on Thursday. Speaking at the awarding of the prestigious Charlemagne Prize for furthering European unity, Merkel said that, should the common currency collapse, "then Europe and the idea of European union will fail." She said that more integration was necessary to ward off the danger.
"We have a common currency, but no common political and economic union," she said. "And this is exactly what we must change. To achieve this -- therein lies the opportunity of the crisis."
Still, despite the seemingly concerted effort at putting a brave face on the crisis and looking for ways out of the bind, not everyone was on the same page. Speaking on German public television on Thursday, Deutsche Bank head Josef Ackermann said he doubted whether Greece would ever be able to pay back the money it is borrowing from European countries and the International Monetary Fund.
"Whether Greece will really be able to meet this challenge ... I doubt it very much," he said.
cgh -- with wire reports