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Euro Falls as EU Warns Portugal to Trim Spending

Here we go again. Just days after agreeing – reluctantly, it must be noted – to provide a minimum of 30 billion euros (US$41 billion) to save Greece from total collapse, senior European Union officials have issued a warning to Portugal to get its expenses under control. This comes as no surprise of course, as the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) have been under the microscope for months now, and have each received a credit rating downgrade within the past year.

Like all members of the EU, Portugal is required to keep yearly deficits to a maximum of three percent of output as measured by the Gross Domestic Product. Given the events of the past two years, and the incredible sums of money consumed by governments in the name of stimulus spending, the deficit limits of late, have been little more than an after thought. In a sign that this is about to change however, European Commission for Economic and Monetary Affairs Olli Rehn told reporters in Brussels today that Portugal’s situation was “worse than anticipated” and corrective action was required immediately.

“The Portuguese stability program is ambitious and quite concrete for the years 2011 to 2013,” noted Rehn. “Additional measures were discussed today and may be needed especially this year.”

When asked about the possibility of Portugal receiving an emergency bail-out from the Eurozone countries, Rehn noted the need to include “disincentives” to the process. In Rehn’s words, the EU needs to “make this safety net of last resort so unattractive that no country voluntarily wants to end up in that situation”.

To some degree, the EU finds itself in a trap of its own making. The sixteen countries making up the Eurozone, have a very mixed history of financial stability, and there is a wide disparity between countries like Germany and France and the afore-mentioned PIIGS. While Germany in particular has helped lead the region to recovery, a handful of weaker countries continue to threaten the entire Zone, along with the value of the euro on the currency markets.

As has been mentioned before in this space, meeting the needs of sixteen sovereign nations – each with its own unique set of strengths and weaknesses – from a single monetary authority, is a daunting task at the best of times. Throw in the extreme challenges brought about by a global recession and credit crisis, and the job only becomes more difficult.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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