Euro under pressure amid jobs, deficit worries (Feature)

By Andrew McCathie and Shabtai Gold Jan 29, 2010, 17:15 GMT

Berlin/Davos - The euro is facing a testing few months amid deepening concerns about Greece's battle to contain its financial crisis and the threat that lengthening job queues could undercut Europe's recovery from its deepest recession in a generation.

Europe's common currency sunk further below the key 1.40-dollar mark Friday, with rising unemployment across the 16-member eurozone helping to reinforce market anxieties about the threat posed to several euro member states of ballooning debt and deficit levels.

'The Greek story is overriding everything,' said Rainer Guntermann, economist with Germany's Commerzbank. 'It is perceived to be the eurozone's weak link.

Concerns about Athens not being able to service its debt as well as the state of finances in eurozone nations such as Portugal and Spain have moved to centre stage at the annual World Economic Forum in Davos.

This has also helped to spark worries about Italy, with the eurozone's third biggest economy seen as facing a further erosion of its international competitiveness in the wake of last year's dramatic contraction in economic growth.

Both Spanish Prime Minister Jose Luis Rodriguez Zapatero and Greek Prime Minister George Papandreou used the Davos gathering to lash out at markets amid speculation that Greece could even be forced out of the eurozone.

According to Papandreou, several eurozone nations are 'being targeted particularly by (groups) with ulterior motives or agendas,' adding that 'often countries are being used as (the) weak link' of the currency bloc.

At the same time, the Spanish leader insisted: 'Nobody is going to leaving the eurozone, in fact more countries are going to be joining the euro in the future.'

But while the European Union's official stance is that Athens has to sort out its financial difficulties, diplomats in Brussels said leading eurozone states are discussing whether they might be forced to bail out Greece.

Nevertheless, the scale of the financial crisis threatening Greece resulted in both Spain and Portugal unveiling this week ambitious budget plans aimed at cutting back their public deficits, which have also been hit by what has been dubbed the Great Recession.

But while the world's political and business establishment have been the Swiss Alpine resort hearing attempts by European leaders to allay fears about mounting debt problems, confidence in Greece's chances of grappling with its crisis has taken a hammering in the markets.

In particular, this has left Greek bonds at the mercy of market rumours, with premiums soaring in recent days and talk about how Europe might deal with the financial woes that have engulfed Athens.

The renewed market worries about Greece are likely to mean eurozone member states' deficits will again dominate next Thursday's European Central Bank meeting.

But analysts are expecting the ECB to retain its hard line on Greece with the bank's Frankfurt-based chief, Jean-Claude Trichet ruling out at a press conference earlier this month any special help for Greece.

'No government, no state can expect any special treatment' in dealing with a crisis in their state finances, Trichet said.

However, the threat hanging over nations like Greece as they battle to knock their finances into shape is the risk that a pickup in eurozone economic growth could trigger an interest rate hike by the ECB.

For the moment, economists believe that the muted recovery underway in the eurozone means that the ECB will keep its benchmark refinancing rate on hold at 1 per cent until well into the year.

But the question is how long will it take for the nations hit by soaring debt levels to press on with tough and unpopular austerity measures so as to bring their public deficits back below the strict 3 per cent of gross domestic product for euro member states.

Speaking in Davos Thursday, Trichet said he expects the combined eurozone deficit level to hit 6 per cent this year. Greece hopes to to cut its deficit from 12.7 per cent to just 2.8 per cent by 2012.

However, the cost of meeting unemployment payments for the growing ranks of Europe's unemployed also threatens place new strains on national budgets.

At 19.5 per cent, Spain now has the highest unemployment in the eurozone. Greece's jobless rate stands near 10 per cent.

Economists say the European Union or the International Monetary Fund (IMF) might be forced to offer guarantee-backed assistance to help nations such as Greece limp through the crisis.

Greek Finance Minister George Papaconstantinou met with IMF chief Dominique Strauss-Kahn Friday as the the parlous state of Athens' finances was a major talking point in Davos.

As part of its IMF deliberations, Athens is understood to have agreed to set up a new national statistics after the country was seen as falsifying its figures to join the euro in January 2001, two years after the euro was launched.