Euro in trouble

Fears of an escalating financial crisis continue to push down the euro and pile pressure on Europe's political leaders. The common currency has fallen sharply against the dollar over the past several weeks.

The euro slid to its lowest level against the dollar in more than four years on Monday, with mid-market rates dropping below $1.23 in early trading.

Europe's common currency has lost about 13.5 percent of its value against the dollar since the beginning of 2010. And its fall is still far from over, experts say.

Economists at UBS expect the euro to drop to $1.10 by the end of the year, just 10 cents off parity with the greenback.

Investors are seeking safe havens

Not surprisingly, gold has soared to record peaks as investors exit the single currency in favor of safe haven investments. And many have fled European investment funds as well, according to the German Investment Fund and Asset Management Industry Association (BVI).

In the first quarter of this year, they have moved 750 million euros ($930.6 million) from European funds, of which they have invested nearly 500 million euros in US stock products.

Meanwhile, hedge fund speculators are having a field day, promoting calls for more regulation of trade in derivatives and more restrictions on naked short selling

Financial markets have been suffering wild swings amid continued concerns over the lingering Greek debt crisis, the 750-billion-euro rescue package agreed by the European Union and the International Monetary Fund.

Traders still fear that the Greek debt crisis could spread to other eurozone countries, such as Portugal, Ireland or Spain, and drive the euro even lower.

The latest round of selling was sparked by reports, since denied, that French President Nicholas Sarkozy had threatened to pull out of the 16-nation eurozone if Germany had failed to agree to a bailout plan for Greece.

Investor uncertainty was further fueled when Josef Ackermann, the chief executive of Deutsche Bank, said in a television interview that Greece may never be able to pay off its debts.

Former Federal Reserve Chairman Paul Volcker poured even more gas on the fire when he spoke last week of a "potential disintegration of the euro."

Even European Central Bank President Jean-Claude Trichet, who has been sharply criticized for his decision to intervene in financial markets under the euro rescue plan, has been unable to conceal his concerns.

"Since September 2008 we have been facing the most difficult situation since the Second World War – perhaps even since the First World War," Trichet said in an interview with the German newsmagazine Der Spiegel. "We have experienced - and are experiencing - truly dramatic times."

String of high-level meetings planned this week

Remarks like these from people who have been or still are in the highest echelons of the global financial community have done little to calm the nerves of investors, private and institutional alike.

A number of high-level meetings are scheduled this week, including one with eurozone finance ministers in Brussels. The German government is particularly keen to see the bloc take drastic action to arrest a slump in confidence on financial markets.

What's needed? Most experts agree that greater budget discipline, strict monitoring and more accurate forecasting are essential.

"We have the necessary governing bodies; that's not the problem," Niels Christoffer Thygesen, a retired economics professor at Copenhagen University, told Deutsche Welle. "But they need to have more teeth."

Thygesen, who served in the European Commission group that mapped out the path to the euro in 1989, added that booting out eurozone nations unable to reign in their spending and meet other criteria was an option, but not necessarily the best one.

It would take years, he said, for them to reestablish their own currencies, and these could fluctuate as widely as they did before the euro. One of the main reasons why Germany was so keen to have many EU member states join the eurozone, he added, was to achieve greater pricing stability for its export machine, particularly in southern Europe.

Rescue package seen as 'empty shell'

The European rescue package agreed in early May was greeted with initial optimism and pushed the euro up briefly. Charles Wyplosz, professor of international economics at the Graduate Institute in Geneva, referred to the package as "an empty shell."

In a paper published on the analysis portal of the Centre for Economic Policy Research (CEPR), he argued that it is one thing to "announce" money but another to make it "available" and questioned how long it would "take the markets to recognize this." Judging by the steady decline of the euro, it hasn't taken too long.

To further complicate matters, investors are now also questioning whether tightening fiscal spending is the right move because it could crush growth in the euro region.

Amid all this financial chaos, some Germans are calling for a return of the deutschmark. But such a move, warns euro expert Thygesen, is "not really an option" because it would be "very costly," among other reasons.

Still, if the euro continues to slide and with it the hard-earned savings of Germans - many of whom were opposed to relinquishing their deutschmarks from the start - politicians in Berlin may be pressured into making some tough decisions they would have thought unthinkable just a few months ago.

Author: John Blau
Editor: Sam Edmonds