MUNICH—The European Union may be entering a deep financial crisis as the euro currency slides to an 18-month low of $1.24 dollars. German Prime Minister Angela Merkel has described the current euro crisis as a “very, very serious situation.”
Investors worldwide are frightened and are selling off a lot of euro-denominated assets and purchasing dollars, yen, and gold instead. Many experts fear that the debt woes suffered by Greece would spread to other EU nations such as Portugal, Spain, and Italy.
“The stock market is down, commodities are following suit,” Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York, said in a Bloomberg interview. “People are selling the euro across anything and buying the yen across anything,” he added.
In the times of the crisis, people go back to the basic secure currency of all time—gold. The South African gold refinery is overwhelmed with incoming orders, as gold prices have risen to its highest point ever, breaking 1,000 euro per ounce.
Last week started off with a surprise rescue fund from the EU and the International Monetary Fund (IMF) amounting to 750 billion euros (US$950 billion) aimed at bailing out troubled members of the EU by means of buying out their bonds in the event of a crisis. EU is also talking about creating its own credit rating agency to lessen dependence on U.S. agencies that some firms feel are harsh in their ratings.
Whether the rescue fund will significantly raise the euro out of its deep fall still remains questionable. Since the announcement of the rescue fund, the euro surged to a euphoric $1.30 last Monday, but by the end of the week it fell back further to $1.24, a record low in 18 months.
While Merkel is a staunch supporter of the rescue fund, many German politicians are split about the decision to provide such a large contribution that could put the EU’s biggest economy under a strain.
“This is the biggest test that Europe has experienced since 1990, if not since the Treaty of Rome was agreed 53 years ago. If the euro fails, it’s not just the currency that fails, but Europe and the idea of European unification. We have a common currency but no common political and economic union,” said Angela Merkel in Aachen, Germany.
In addition to the 750 billion euro rescue fund, EU together with IMF has also issued a $110 billion euro emergency package to Greece last Friday, of which Germany agreed to pay the biggest part.
Since last week Merkel has received the most criticism she has probably ever had during her two terms as German chancellor. As she was giving a speech in a German city of Bielefied, many protesters were out on the streets shooting water guns and blowing sirens.
"Greece is only the first state that is going down, the next one will follow very soon and Germany will end up paying for them all," says Hendrick Böhmig, a seller of luxury BMW cars, who was taking part in the protests. "People don't realize what's coming. When their kindergarten closes to pay for Greece, people will go on to the streets."
French President Nicolas Sarkozy has threatened to pull France out of the eurozone if Germany refused to pay an appropriate part in the 750 billion euro rescue fund.
“There are fundamental questions about the euro’s survival,” said Samarjit Shankar, who is a managing director for the foreign-exchange group in Boston at BNY Mellon. “Emotions are running very high. Investors are coming around to fact that all the belt-tightening measures put forth by eurozone countries will have a huge impact on growth not only in Europe but around the world,” he added.
Jonathan Loynes, chief European economist at Capital, predicts that the euro will soon fall to $1.10 a hit parity with the dollar by the end of 2011.
“If there is any possibility at all that its life may be coming toward an end, we see no reason why it should not drop to similar levels,” he argued referring to the fact that euro was at parity with dollar for most of its early life.