European finance ministers met in Brussels tonight to discuss the €750 billion debt rescue plan and the opening of their budgets for peer review.
The meeting happened on a day the euro was hit by fears austerity measures would stifle economic recovery.
The single currency, which has lost 17 per cent of its value in six months, fell to $1.2235 against the US dollar yesterday, the weakest since April 2006, before rising above $1.23 in late trade
Fears that deficit-cutting in Greece and elsewhere in the euro zone will hurt growth were at the forefront of investor concerns today, sending the single currency to a four-year low and fuelling fears it may face freefall.
Greece is seen by many economists as a bellwether for other vulnerable euro zone economies, being the first to tap an EU-IMF aid mechanism to service a €300 billion debt.
Athens has already received €5.5 billion in aid from the IMF and is due to get more from the EU tomorrow to pay an €8.5 billion bond maturing on Wednesday.
The gathering tonight — and a follow-on meeting tomorrow involving euro and non-euro ministers — marked the start of an intensive negotiation on new rules to intensify EU budgetary surveillance. Ireland was represented at by Minister of State Dara Calleary.
In this debate Berlin wants all euro governments to copy a German constitutional provision which prohibits the federal government from running a budget deficit in excess of 0.35 per cent of gross domestic product by 2016.
Most of the ministers return to Brussels on Friday for a separate meeting chaired by Herman Van Rompuy, president of the European Council. Mr Van Rompuy has a mandate to explore treaty change as an option to reinforce surveillance, something sought by German chancellor Angela Merkel.
Among other proposals for reform, a European Central Bank member proposed an independent body should be able to punish euro zone countries who went too far into the red.
The euro slumped to a four-year low today on Asian markets after Friday's sell-off in the West, falling to its lowest since April 2006 on $1.2234. It later recovered to $1.235 although analysts remained bearish.
"The euro is caught between a rock and a hard place at the moment," said Howard Archer, chief UK and European economist at IHS Global Insight, predicting a further drop towards $1.15 over coming weeks.
Bank shares in Greece, whose debt crisis prompted the rescue package aimed at stopping a spread to other vulnerable euro zone members and even destabilising the global economy, tumbled 4 per cent on Monday.
Prime minister George Papandreou was quoted as saying French and German leaders backed a possible ban on so-called credit default swaps blamed for increasing borrowing costs for vulnerable countries like Greece.
He said he had written to US president Barack Obama jointly with German chancellor Angela Merkel, French president Nicolas Sarkozy and Eurogroup chairman Jean-Claude Juncker on whether the credit default swaps market should be closed.
In an interview with Germany's Handelsblatt newspaper, Mr Papandreou criticised financial markets for overreacting to Greek's debt crisis and accused speculators of helping to provoke panic reactions.
"Angela Merkel, Nicolas Sarkozy, Jean-Claude Juncker and I have suggested in a joint letter to Barack Obama whether the markets for credit default swaps ... should not be closed. The G20 countries want to discuss this," he said.
Politicians have long called for tighter control of speculators, who they believe exacerbated Greece's borrowing problems.
But Mr Papandreou's call to consider closing the market for this insurance appeared to go further than anything demanded so far and would probably meet stiff opposition from companies and other bond buyers who depend on it to cover their risk.
In action to back up the European rescue package, the European Central Bank bought €16.5 billion worth of bonds in the first week of its government debt buying program and will offset the purchases by taking one-week deposits from banks.
The bank's announcement was the first detailed glimpse into the euro zone's government bond purchase programme which began last week after the ECB abandoned a long-held resistance to it as part of the rescue package.
Germany's plans to support the euro and avoid any new debt crises were disclosed by a finance ministry spokesman, who declined to confirm reports Berlin wants a German-style debt brake across the single currency zone.
The Sueddeutsche Zeitung and other newspapers had reported Berlin was pushing the idea of tougher fiscal rules based on a German law to shield the euro zone from excessive debt.
European Central Bank Executive Board member Juergen Stark said euro zone states should be inspected by an independent body able to punish them if their budgets tip too far into the red. "We should think about an independent commission ... which continuously deals with the budget situation in the countries," he told Austrian radio.
The commission would be able to help supervise euro zone members' budgets and impose sanctions against profligate countries that would kick in automatically rather than at the discretion of other members. "(We need) measures for timely corrections when budget deficits are at risk of running out of control," Mr Stark said.
Ms Merkel said yesterday that this month's huge rescue package had only bought the euro zone time to tackle its basic problem - a yawning gap between its strongest and weakest economies.