The EU finance ministers are to meet in Luxembourg on Monday 7 June faced with some uncomfortable questions about Europe’s economic outlook. That discussion will be preceded by a meeting of the Eurogroup, the eurozone finance ministers. The president of the ECB will be urging the Eurogroup countries to reduce their deficits. Ministers are expected to sign off on the final details of a €440 billion special purpose vehicle, intended to raise money on markets which can then be lent to struggling eurozone states. The vehicle is the largest component of a €750 billion bail-out assembled by the EU and IMF in May. Its duration will be prolonged to five or six years, from the initially agreed three, following concerns that recipient countries would need longer to pay back the loans. An overall agreement was reached on Friday, following a series of phone calls between Paris and Berlin.
Under the final plans, national Parliaments will be given no veto power over future activation of the mechanism, in spite of the strong demands for that from Germany, Austria, the Netherlands and Finland. It has also been agreed that the fund will lend money at market conditions, i.e. without applying lower interest rates to borrowing countries. According to Reuters, the loans will be guaranteed by the whole eurozone bloc, despite Germany favouring making each country responsible for its own share of money lent.
The meeting in South Korea on Friday and Saturday of finance ministers from the G20 group of advanced and developing economies has exposed differences over approaches to growth that will not reassure the financial markets. The meeting saw heated exchanges between US and European representatives, with division centering on the speed at which government budget deficits should be reduced. US treasury secretary Timothy Geithner argued the case for fiscal consolidation over the “medium term,” while Europeans, rattled by the region’s ongoing debt crisis, called for faster cutbacks.
In addition, the debt markets were hit on Friday by concern about the possibility of a default by Hungary and the Hungarian forint fell sharply on the foreign exchange markets. On Friday a press aide to newly elected Prime Minister Viktor Orbán said Hungary could miss its deficit-reduction targets and would need to work to avoid a default. Ministers in the centre-right government back-tracked their rhetoric over the weekend saying the original statements had been intended for domestic political gains, possibly to justify spending cuts.
French PM François Fillon also said on Friday that the weakening currency was “good news” because it could boost European exports, further accelerating a currency slide and prompting the sale of French government bonds.
On Monday morning, after disappointing news from the US job market and new European debt woes, the euro currency fell to a fresh four-year low trading on Asian markets – hitting under the 1.19 mark for the first time. Against the Yen it dived to an eight year-low as analysts see another week of hammering for the single currency. The euro dropped 2.8% over the weekend to $1.188, its lowest value since March 2006, before rebounding above $1.19. This placed the value of the dollar at 0.8419 euros. On Friday the euro had fallen below the psychologically important benchmark of 1.20 dollars. Analysts said economic insecurity had prompted investors to focus on the dollar as a global reserve currency.
Sources: European Voice, EUobserver, Euronews