Euro slides as leaders call for eurozone gov't

AP News
Posted: Aug 16, 2011 3:52 PM
Euro slides as leaders call for eurozone gov't

The euro slid Tuesday as investors grew pessimistic over European attempts to contain a government debt crisis when they called for greater economic coordination among countries.

French and German leaders met in Paris to discuss a debt crisis that has rankled markets since early last year. The situation was exacerbated Tuesday by new European Union figures that show that growth has slowed sharply in Germany, the continent's powerhouse.

Economic growth in the 17 countries that use the euro slowed to 0.2 percent between April and June from 0.8 percent in the previous quarter. Germany's growth fell to 0.1 percent from 1.3 percent.

European politicians have come under some criticism for not doing more to contain the potential for economic contagion. Disappointment over comments made Tuesday by French President Nicolas Sarkozy and German Chancellor Angela Merkel further dragged on the euro, analysts said.

In late afternoon trading in New York, the euro slid to $1.4397, after first spiking to $1.4472 immediately after French President Nicolas Sarkozy and German Chancellor Angela Merkel began presenting their plan. Late Monday, it was worth $1.4451.

Some investors had hoped the nations' leaders would propose new "eurobonds" to immediately integrate the bloc's various economies and ease fears about surging borrowing costs for some members. Sarkozy and Merkel ruled out immediately issuing common government debt, as well as expanding the size of the bailout fund beyond the existing euro440 billion ($633 billion), to support countries having difficulty selling bonds on the public markets.

Investors may be concerned about how easily the euro bloc could put in place what French and German leaders suggested, and even if the plan is a good one for solving Europe's economic problems, analysts said.

"On the surface, it sounds very bold, a federal `eurozone,'"said David Gilmore of Foreign Exchange Analytics in Essex, Conn. But "the practical part still seems, to me anyway, to be a pipe dream."

The plan to form a deeper fiscal union among the 17 countries using the euro "made the euro credible," but governments might not want to surrender their rights to set tax and budget policies, Gilmore said.

And the proposed tax on financial transactions may hurt demand for European assets, Gilmore said.

The plan wouldn't help make European economies more competitive, and it wouldn't help kick-start their economic growth, said Marc Chandler, the head of currency strategy for Brown Brothers Harriman in New York. Moreover, there's going to be a "big pushback" to the French-German plan from the euro bloc's other members, he said.

In other trading Tuesday, the British pound rose to $1.6457 from $1.6389, while the dollar was unchanged at 76.78 Japanese yen.

The U.S. currency rose to 0.7938 Swiss franc from 0.7843 franc, extending its gains from last week, when the Swiss central bank began efforts to contain its currency's rise. Last Tuesday, the dollar hit a record low of 0.7062 franc, having dropped more than 30 percent this year. The euro was approaching parity with the franc.

The franc, like gold and the yen, has benefited from the desire for safe investments during periods of extreme turbulence in financial markets.

The dollar also edged up to 98.30 Canadian cents from 98.11 Canadian cents.