The Debt Crisis in the Eurozone Could Escalate into a Currency Crisis

Last week, the euro was under pressure in the currency markets as investors were disappointed by the lack of concrete EU measures to assist financially troubled Greece, causing the exchange rate of the European currency against the US dollar to fall to a new low in nearly nine months.

Last week, the dollar index, which shows the value of the US dollar against six major world currencies, rose slightly by 0.01 percent to 80.35 points. However, by the end of the week, it reached a new high since July of last year – 80.74 points. At the same time, the dollar strengthened by 0.5 percent against the European currency, bringing the price of the euro down to 1.3613 dollars. At one point, it dipped to just 1.3533 dollars, a new low since May of last year.

However, the European currency strengthened against the Japanese yen by 0.5 percent to 122.62 yen. The dollar also strengthened against the yen – by 1.5 percent to 90.02 yen. The unique European currency has been under pressure in recent weeks due to concerns that countries with massive debts, such as Greece, Spain, and Portugal, will not be able to stabilize public spending, which is essential for recovering from the recession.

European Union leaders did not offer Greece any concrete financial assistance on Thursday to cut the enormous budget deficit, but only promised decisive and coordinated action if the need arises to protect the financial stability of the eurozone as a whole. The indecisive response of the European Union summit to the Greek debt crisis disappointed the markets and prompted analysts to speculate about a possible currency crisis.

“As concrete details about a potential EU support package were absent, there is a risk of escalation of the debt crisis in the eurozone that could easily turn into a currency crisis. Financial markets are disappointed by the lack of concrete details about any form of assistance that the EU could provide. Therefore, the euro is likely to continue to fall,” says Neil MacKinnon, an economist at the investment bank VTB Capital.

Luxembourg Prime Minister Jean-Claude Juncker, head of the group of finance ministers from 16 eurozone member countries, dismissed any possibility on Thursday that Greece would fail to meet its debt obligations. However, this did not calm investors in the currency markets. The euro is under pressure also due to signs of weakening recovery in the eurozone economy.

On Friday, it was announced that the eurozone economy grew by only 0.1 percent in the fourth quarter of last year, while in the previous quarter, the gross domestic product growth was 0.4 percent. Meanwhile, Germany, the largest European economy, stagnated. (H)