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From Times Online

May 20, 2010

Euro under renewed attack ahead of EU crisis talks

David Charter and Gráinne Gilmore

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Shocked European ministers are preparing for emergency talks to shore up the euro after markets fell in reaction to panic measures in Germany.

Angela Merkel stunned EU capitals by warning that the euro was in danger and triggered fears of a fresh financial meltdown by announcing a ban on risky trading practices by speculators. The German Chancellor’s actions opened up new cracks in the single currency, drawing sharp criticism from France and prompting Brussels to issue an appeal for unity.

The euro plummeted to a new low against the dollar yesterday before making a slight recovery.

In early morning trading it dropped again to $1.2327, although this was still higher than the four-year lows of below $1.22 seen yesterday.

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The European markets also rebounded slightly in early market trading. The FTSE 100 index opened up nearly 0.5 per cent at 5,183, Germany’s DAX opened up 0.6 per cent and France’s CAC rose by half a per cent. All three markets plunged by more than 3 per cent yesterday.

European finance ministers, who have just hammered out a massive rescue plan for Greece, will hear controversial calls from Germany at a meeting tomorrow for changes to the Lisbon treaty to give Brussels powers to co-ordinate national budgets.

Ms Merkel believes that the EU should have stronger powers to organise the “orderly insolvency” of countries such as Greece that set giveaway budgets with no means of paying for them. After announcing a ban on speculative share trading in Germany’s top financial institutions and the bonds of eurozone countries until next March, she warned: “This challenge is existential and we have to rise to it. The euro is in danger. If we don’t deal with this danger, then the consequences for us in Europe are incalculable . . . If the euro fails, then Europe fails.”

In a further sign of the determination to clamp down on risky trades, the EU executive’s financial markets chief said that the European Commission would propose a new regime to control derivatives this summer.

Michel Barnier said: “This Summer we will make proposals to reduce counterparty risk — the issue that caused the failure of Lehmann Brothers. For transparency, we will propose the use of trade repositories to collect all information on all transactions. And we have to make sure that this information is available to all European supervisors.”

This came as David Cameron prepared for his first visit as Prime Minister to Paris and Berlin, where he is likely to come under pressure to commit more British funds to EU bailout programmes.

His desire to build relations with Ms Merkel will be tempered by his reluctance to see any more powers transferred to Brussels. However, with 54 per cent of Britain’s exports going to Europe, the economy is not immune to the effects of the euro’s problems.

Ms Merkel may have intended her words to be a rallying cry to stop the crisis of confidence spreading from Greece to Portugal, Spain and Italy. But the markets were shaken because Germany is seen as the bedrock of the euro, which was introduced just ten years ago and now covers 16 countries.

Fears are growing at the highest level in the European Commission over the size of Italy’s national debt and its ability to cope if markets turn on it. Further turmoil is possible today as Asian investors prepare to dump huge amounts of euros on the market.

Wolfgang Schäuble, the German Finance Minister, called for an urgent rewriting of the eurozone rulebook. He told the Financial Times: “I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.”

Mr Cameron will meet President Sarkozy of France tonight and Ms Merkel tomorrow. He will resist her demand to reopen the Lisbon treaty to beef up European Commission powers to scrutinise national budgets.

Herman Van Rompuy, the European Council President, called the finance ministers’ meeting in response to Ms Merkel’s demands for a treaty change. Michel Barnier, the EU Commissioner for Internal Markets and Financial Regulation, said: “It’s important that member states act together.”