The euro has been under pressure on Monday and is poised for more losses until the end of the year. After Friday’s EU Summit, investors are beginning to digest the outcome of the new EU accord that aims at treaty changes in order to forge tighter fiscal controls amongst euro zone member countries.
Initial reaction was positive, and euro was given a slight lift on Friday. By Monday, sentiment was damp once again, also exacerbated by Moody’s negative comments.
While the new accord aims for stricter budget discipline amongst the 17 euro member economies, investors are concerned that this new deal does not deal with the immediate problem and does not offer how to deal with the main issue facing the euro zone, which is more economic growth.
“The fundamental problem in the most troubled European countries is the debt burden is growing at a faster rate than their economies are,” said Michael Cheah, who manages a $1 billion fixed income fund at SunAmerica Asset Management in Jersey City, New Jersey. “That’s been the problem for a long time. Yet the only solution we get is more discipline, more austerity.”
Thus, while the proposed changes to the treaty include measures that would make it harder for governments to wriggle out of their highly unpopular and painful austerity programs, this may be good to prevent future debt crises, but in the short term this could actually hurt growth.
Especially affected will be weaker countries such as Greece, Portugal and even Italy, where already large debt burdens will make growth harder.
Italy’s government, for instance, presented a 30 billion euro ($40 billion) package of spending cuts and tax hikes this week even though the economy is forecast to shrink by 0.5 percent this year and post zero growth in 2013.
Many analysts believe that the euro zone is already in recession. Meanwhile, the European Central Bank this week downplayed its growth projections for 2012.
Credit ratings agencies have already threatened to downgrade euro zone economies. Standard and Poor’s threatened to cut even AAA rated countries like France and Germany. Moody’s today said they will still review euro zone countries rating in the first quarter of 2012.