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Yesterday the Euro hit a four-year low against the dollar. The euro fell to $1.2237 in early trading on Monday and actually fell slightly below $1.22 today. Investors fear that the austerity measures being put in place in many of the eurozone countries will hinder growth. Low growth would also mean low interest rates, so holding the currency would bring about poor returns. A lot of these measures stem from Europe's debt problems, and specifically Greece's recent troubles. This is very ironic because of the fact that their troubles may actually stem from the euro.
Back in 2002, Greece's economic reforms that led to abandoning the local currency, the drachma, in favor of the euro made it easier for the country to borrow money. Couple the country's debt-funded spending spree along what it spent on the 2004 Athens Olympics, and this was the beginnings of a ticking financial time-bomb. After the downturn, Greece had to spend more on benefits and received less in taxes (partly due to widespread tax evasion), and in turn lenders started charging higher interest rates. Greece cannot repay much of its debt, and needs a 110 billion euro bailout from the EU and IMF to help out. Although the default risk is over, other risks are not.
All of this has sent the euro plunging. Traders have even more to fear, because countries with large budget deficits such as Greece, Spain and Portugal may be tempted to leave the euro. This in turn would allow that country's own currency to fall in value, and thus improve its competitiveness. This could create huge problems for the monetary union, although the EU has vowed to keep the eurozone together.
So what's the solution? The deep spending cuts must be met with measures to stimulate growth and investment. There needs to be a long-term plan. Last week EU ministers offered a 750 billion euro plan to support the currency, and though initially the currency rose, it fell just as quickly. This is only a short-term plan, which is postponing the crisis rather than solving it as needed.
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