Euro Falls to Lowest Level Since Launch Amid EU Concerns over Budget Discipline

Strategic Insights -

The euro hit its lowest value since its introduction yesterday, sinking below $1.05, due to the European Union's decision to allow Italy to relax its budget deficit target. European Central Bank president Wim Duisenberg expressed concern that the move could undermine the euro's credibility, warning that it could be damaged if other countries follow Italy's example. The ECB's efforts to reduce deficit targets appear to be losing steam, with Mr. Duisenberg stating that the pace of deficit reduction has slowed. The move has raised concerns among financial markets about the EU's Stability and Growth Pact, a cornerstone of European economic and monetary union.

Key Takeaways:

  • The euro fell to its lowest level since its launch, hitting below $1.05, due to the EU's decision to allow Italy to relax its budget deficit target.
  • Wim Duisenberg, the European Central Bank president, warned that the euro could be damaged if other countries follow Italy's example, undermining the ECB's efforts to reduce deficit targets.
  • Italy has won permission to increase its 1999 deficit from 2 per cent to 2.4 per cent of GDP in the event of a serious economic downturn.
  • The EU's Stability and Growth Pact, a cornerstone of European economic and monetary union, is under pressure due to the relaxed budget target.
  • Mr. Duisenberg stated that aggregate deficits had fallen by one percentage point a year from 1993-1997, but would fall this year by "not much more" than 0.3-0.4 percentage points, the same as in 1998.
  • The euro has fallen by more than 11 per cent against the dollar since touching a high point of $1.1877 on January 4.
  • Mr. Duisenberg was optimistic about the euro-zone's economic prospects, predicting growth would rise to about 2.5 per cent next year, but noted Germany's structural rigidities need to be addressed.

Statistics:

  • The euro fell to $1.05, its lowest level since its launch.
  • Aggregate deficits had fallen by one percentage point a year from 1993-1997.
  • The euro has fallen by more than 11 per cent against the dollar since January 4.
  • Italy has been granted permission to increase its 1999 deficit from 2 per cent to 2.4 per cent of GDP.
  • Mr. Duisenberg predicts euro-zone growth will rise to 2.5 per cent next year.

Sources:

  • Financial Times, "Euro falls to below $1.05," by A suppliers, 1999.
  • European Central Bank, 1999.
  • Financial Times, "EU agrees to ease Italy's budget target," by A suppliers, 1999.