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European Single Currency Seen At A Turning Point

Some of the giant euro sculpture's stars have faded in Frankfurt and abroad.
Some of the giant euro sculpture's stars have faded in Frankfurt and abroad.
There have always been doubts about whether the euro could succeed. It presently binds together 16 European Union members, from top world economies like Germany to stumbling, mismanaged economies like Greece.

The current international whirlwind over Greece's indebtedness has revealed the basic flaw in the single currency, namely how to coherently bridge with one monetary value the immense gap between the strongest and weakest economies of the eurozone.

Greece today is expected to receive a tranche of 14.5 billion euros ($18 billion) from an emergency loan package offered by the EU and the International Monetary Fund. The same two institutions have also put together a standby rescue fund of almost a trillion dollars to support other troubled eurozone nations if the need arises.

But despite the packages, stock markets around the world have suffered severe falls on fears that Athens may eventually default on its international debts, and that other deeply indebted eurozone members like Spain and Portugal could fall into the same abyss.

Jean-Claude Juncker, who is chairman of the EU's "eurogroup" of countries that have adopted the euro, at a Brussels news conference late on May 17, praised Iberian moves to cut public spending and get their houses in order.

"We consider the measures taken by the Spanish and Portuguese governments are courageous measures and demonstrate an adjustment trajectory which is satisfactory because those two countries accelerate their fiscal consolidation they had announced beforehand in their stability programs," Juncker said.

Juncker also described the euro as a "credible currency."

But, looking at the broader picture, some European leaders are now saying there must be more central control over eurozone member states' fiscal policies, meaning national budgets. Budget policy and implementation are presently the preserve of national governments and parliaments, with patchy adherence to EU norms and recommendations.

Hints of a new order came from EU Monetary Affairs Commissioner Olli Rehn, who writes in a Finnish newspaper, the "Helsingen Sanomat," that in future "the development of state debt must be followed more closely than before [by Brussels], and possible downward spirals must be cut off in time."

Call For Convergence

German Chancellor Angela Merkel, speaking at a trade-union congress on May 16 took up the same theme. She said that in the past week there had been "unprecedented" speculation against the euro, and she called for more economic convergence across the eurozone.

"This calls for more regulation," Merkel said. "But unfortunately this speculation was, and is, only possible because there are considerable differences in economic strength and respective indebtedness between the member states of the euro."

She also said the trillion-dollar standby rescue package is not a solution but a starting point.

"We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual euro zone countries," Merkel said. "And, ladies and gentlemen, what happened in Greece is totally unacceptable, that statistics were forged for years. We have now said that Eurostat must receive better access."

Her reference to the EU statistics office gaining more overview of national economic data stems from the fact that Athens is now known to have presented false and overoptimistic economic figures to Brussels to gain entry to the eurozone.

...And Caution

A front-page article in the daily "Financial Times" on May 17 reported that Berlin is to press other eurozone countries to adopt their own versions of Germany's balanced-budget law.

This law was inserted into the German Constitution last year and prohibits the federal government from running a deficit of more than 0.35 percent of gross domestic product (GDP).

If adopted by eurozone members, coupled with extra oversight by the EU at the center, the measure would bring a dramatic tightening of fiscal discipline across the bloc.

But Monetary Commissioner Rehn cautions that any belt-tightening must be done carefully, so as not to strangle the tender plant of economic recovery from the global recession.

"It is important that not everyone will accelerate consolidation in a uniform way -- that would lead to a very restrictive fiscal stance for the euro area as a whole, which would risk depressing economic growth and harm the recovery that is currently under way," Rehn said.

Anyway, it would be difficult to get all eurozone members to agree to such draconian steps as the Germans suggest, given the jealous way governments guard their sovereignty. And such a centralizing approach would probably scare away from future eurozone membership those EU members wary of more European integration, like Britain, Denmark, and Sweden.

Euro Repercussions

The euro continued its downward slide this week, briefly touching a four-year low against the U.S. dollar. This has made exports cheaper and thus easier for eurozone countries. Even Greece is benefiting because its considerable exports to non-eurozone destination Turkey are now more price competitive.

But the euro decline is spreading unwelcome ripples further afield. A Chinese Commerce Ministry spokesman, Yao Jian, told journalists on May 17 that the yuan has risen about 14.5 percent against the euro during the past four months.

He said this is increasing cost pressure for Chinese exporters and will also have a negative impact on China's exports to European countries.

The European Bank For Reconstruction And Development issued a statement at its annual meeting, in the Croatian capital, Zagreb, warning that the volatility surrounding the euro is "overshadowing" the recovery of some countries in Central and Eastern Europe.

written by Breffni O'Rourke based on wire reports
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