The euro has fallen sharply on foreign exchange markets over concerns about the Stability and Growth Pact, the EU rules for controlling budget deficits. The concern was sparked by news that Italy has supported a widening budget deficit.
The losses, which leave the euro over 12 per cent below peaks reached immediately after its introduction in January, were compounded by the apparent indifference of other European policy-makers, including European Union acting monetary affairs commissioner Mr Yves-Thibault de Silguy and the Portuguese finance minister.
The euro plunged to a record low of $1.0475 after Italy warned that it would not be able to achieve a budget deficit target of 2 per cent of gross domestic product (GDP) in 1999 because GDP itself is estimated to be lower than previously forecast. It later closed at $1.0480 from $1.0604 a day earlier. It also fell slightly against sterling, closing at 66.56p from 66.18p. In consequence, the pound closed at 83.33p.
"If they are going to allow Italy to get away with this, what guarantee is there that any issue in the Stability Pact is going to be adhered to?" Mr Jeff Woodruff, currency analyst at Bank of Boston in London, said.
And confidence was also undermined by the apparent indifference of policy-makers to the drop. According to Mr de Silguy, the fall to record lows amid signs of European economic weakness is "not worrying".
Analysts said even core euro zone countries, such as Germany and France, could not rule out wider budget deficits, given the lack of economic growth within the region.
"It is easy to pick on Italy, but where is the incentive for any of them to keep their deficits under control given that they are all in the (EMU) club?" Mr David Coleman at CIBC said. "It is all coming home to roost."
Mr Colin Hunt, economist at Goodbody Stockbrokers, said the sanctioning of fiscal laxity for Italy had damaged market sentiment about the euro.
"It is not that a 2.4 per cent deficit is a problem, it is probably what Italy needs at this time. But rather that it is the first sign that the Stability and Growth Pact may be ignored.
He noted that the euro is now on a straight line down from a high of $1.1847 after it was launched. "There is little reason to think that this trend will be reversed."
