EU leaders determined to keep bloc

Published May 10, 2011

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EU leaders are showing their resolve in keeping the euro zone together, agreeing in an unannounced meeting on Friday last week to review the terms of the e110 billion (R1 trillion) lifeline Greece received last year.

The euro tumbled 3.45 percent in the final two days of last week, the biggest back-to-back loss since 2008, as the European Central Bank (ECB) signalled it was in no rush to raise interest rates and Der Spiegel magazine said Greece might withdraw from the currency bloc.

EU officials denied the report and said Greece would need more aid after investors drove yields on its two-year notes to more than 25 percent.

Even with last week’s decline, the single European currency remains this year’s best performer after German Chancellor Angela Merkel said on January 12 that her country would do “whatever is needed to support the euro”, exports grew and the ECB raised borrowing costs for the first time since 2008. Correlation weighted indices show the euro has gained 3 percent against nine of its peers, compared with a drop of 5.1 percent in the dollar and 4.6 percent in the yen.

The monetary union would survive “as long as the core economies remain strong”, Stuart Thomson at Ignis Asset Management said on Saturday.

The meeting of finance ministers “shows their determination to support Greece. The move downward in the past few days has been very rapid and we would expect it to get some support from here,” he said of the euro.

The euro fell 3.3 percent to the dollar last week to $1.4316, while weakening 4 percent against the yen to ¥115.44 in the biggest weekly decline in a year. The shared currency was 1.3 percent lower versus the pound, fetching 87.49p, and dropped 1.8 percent against the Swiss franc to Sf1.2582. It traded at $1.4405, ¥116.24, 88.02p and Sf1.261 yesterday.

French Finance Minister Christine Lagarde, who urged the EU in 2007 to weaken the currency when it was trading at the same level as now, said last week that the euro was doing “extremely well” and its appreciation would not hurt economic growth.

Luxembourg Prime Minister Jean-Claude Juncker said the same on May 2, adding that the currency’s appreciation was “not worrying”.

As Greek bonds tumbled in recent weeks, the euro rose to $1.494 last Wednesday, the strongest since December 2009, before falling. The 17-nation currency has appreciated from last year’s low of $1.1877 in June. Thomson said EU leaders probably viewed this as “a vote of confidence in the euro” and in their efforts to contain the region’s sovereign debt crisis,.

“From their perspective, the fact that business confidence in Germany and France remains strong is evidence of their ability to withstand the currency appreciation,” he said.

The European Parliament approved a permanent European Stability Mechanism in March to succeed last year’s e440bn, three-year European Financial Stability Facility created to assist the most-indebted countries.

While Greece, Ireland and Portugal have sought bailouts, the euro’s rally shows easing concern that the currency union will dissolve, a risk highlighted by former US Federal Reserve chairman Paul Volcker in a speech on May 13 last year in London and billionaire investor George Soros on January 26 in Davos, Switzerland, at the World Economic Forum.

The euro is up 9.7 percent against the dollar since Merkel’s January comments, which were endorsed by French President Nicolas Sarkozy. In Germany, Europe’s largest economy, business confidence rose to a record in February.

Strategists are struggling to keep up with the euro’s gains. They raised their year-end estimate an average of 2.2 percent last month, the most for any Group of 10 currency, and their median forecast of $1.40 is still weaker than the current market rate. – Bloomberg

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