Short Lived Optimism

The German press are reporting that the finger is hovering over the Euro panic button as this afternoon trading in the currency reached a four year low.

Germany's finance minister, Wolfgang Schaeuble, said at meeting of finance minister from the 16 euro countries that reducing out of control deficits was "the only task that everyone has to fulfill for himself and for the common good."

The euro traded near four-year lows Monday amid warnings from European leaders that a (euro750 billion) $1 trillion loan announced last week to prop up troubled governments would not be enough to defuse market the continent's government debt crisis. Things are looking grim and the markets seem to be walking away from the deal and sloping off towards the exit.

Earlier today the Dollar/Euro exchange fell to $1.2237 — its lowest since April 2006, undermined by the prospect of continuing fear and turmoil over the heavy government debt loads among its members. If that wasn't enough to cause grown men to reach for the closest brown paper bag to breathe into (sometimes works with panic attacks) the news that the Euro has now fallen 12% since May 10th most certainly did.

Schaeuble said that eurozone nations must make a reality the euro750 billion ($1 trillion) rescue package they agreed last week, saying it had to become "credible in each member country" so that "what we agreed means something."

The fund initially calmed markets last week but has more recently failed to reassure them that European governments can reduce swelling debt levels. Eurozone finance ministers are holding their first talks on suggestions put forward by the EU executive to toughen the fundamental rules that govern the 11-year-old currency, hopeful they can catch it before it reaches puberty and starts leaving its room in a mess and forgetting to pick its washing up off the bathroom floor.

German Chancellor Angela Merkel conceded over the weekend that the package was no more than a band-aid solution to the problems afflicting a number of eurozone countries, from Ireland all the way across to Greece. She wants bigger legal changes, such as a limit on how much debt countries can run up each year and the ultimate threat of kicking a country out of the euro if it can't stick to the rules. Looking at the state of the Irish economy last week you could almost see a Little Britain in progress, no not the comedy series, in the way that the Irish believed that you could spend your way through a recession. The country is awash with public expenditure projects and has something like 300,000 empty properties across the country which is not only astonishing given the size of the population but frankly quite scary.

European Central Bank President Jean-Claude Trichet echoed Merkel when he told German newspaper Der Spiegel that the package "bought time, nothing more" and that there is now a need for "a quantum leap in the governance of the euro area."

The problem is of course that investors are shying away from the Euro and if you can't persuade punters (in this case the markets) to buy into your vision you are really stuffed. There is a lack of belief out there that the EuroZone governments can force through the severe austerity measures promised in the face of likely political and social unrest. And even if they do, there are fears the cutbacks will kill off growth — and make it even harder to pay government debt.

The euro's slide by itself is not all bad after huge gains against the dollar last year. It makes eurozone exports cheaper for dollar buyers in the U.S. and Asia and so could help spur the weak economy.

However the idea of one for all and all for one is something that does not appeal to those who want to see the power of the EU reined in and limited to those of a super trading group rather than a collection of countries constantly watching over each other. Tuesday 22nd June is Budget Day here in the U.K, the first for the Con-Dem coalition, although next Monday sees the first round of public expenditure cuts revealed. As Angela Merkel remarked when discussing the Greek position, oo er missus, whatever George pulls out of the hat it will be little more than a band-aid on what is an ailing economy, what we must hope for however is that the markets react favourably, because however much we may loathe those City boys we need to see some confidence returning to the market.