Christine Lagarde, the French finance minister, pledged on
Friday that European politicians would enact tough measures to
restore confidence in the euro as the currency plunged on
foreign exchange markets.
The euro slumped to an 18-month low against the dollar on a
report that French President Nicolas Sarkozy had threatened to
pull France out of monetary union in a showdown with German
Chancellor Angela Merkel a week ago.
Lagarde angrily dismissed the reports as
rubbish, telling Emerging Markets that it
was almost insulting to be asked about the claims.
Rumours are rubbish, she said. The euro fellow
below $1.24 and one analyst, Capital Economics, warned it would
hit parity next year.
The claims ended a traumatic week for the euro, which
saw European leaders put together a temporary stabilisation
fund last weekend to prevent contagion from Greece to other
member states, and the European Central Bank perform a u-turn
on its pledge not to buy euro government bonds.
Lagarde said that a detailed and ambitious plan
to reform the rules that govern fiscal stability in Europe
would be put to a committee of EU finance ministers next week
before going to heads of state for endorsement at their June
We are creating a system, so that markets can see that
we mean what we say, and not only say what we mean, she
There are initiatives underway, which are being
accelerated, she said, highlighting
European Commission proposals unveiled this week to
strengthen the stability and growth pact. We are
determined to explore the ways and means to strengthen the
[Stability and Growth] pact, she said.
Her comments struck a chord with experts who have argued the
eurogroup must commit to deeper economic and political reforms
to ensure its survival.
Barry Eichengreen, economics professor at the
University of California told Emerging Markets:
Now they have no choice. People will consider the
alternatives and will realize that strengthening the eurozone
with all the further compromises of national sovereignty that
will imply is the least worst alternative. No one will like it
but theyll like the alternative less.
Its always been clear that Europe has only half
a monetary union and it needs to build the other half. Now we
see how urgently they need to build the other half.
Lagarde also made it clear that France was determined to
lead a renewed push to extend and tighten financial regulation
in a move that would put her in conflict with other EU member
states such as the UK.
She told Emerging Markets that she would
pursue the acceleration and furthering of the financial
regulation scheme that we need to put in place in order to
prevent the acceleration of the crisis.
She said this included appropriate regulation of
credit default swaps, improvement of regulation of rating
agencies, and strengthening of banks capital.
All these topics have been on our radar screen, which
[now] have to be accelerated, she said. The UK and France
are already heading for a showdown over controversial hedge
Her tough words came a day after Paul Volcker, the former
chairman of the US Federal Reserve, warned of tat the euro
faced potential disintegration unless politicians
enacted economic and political union.
Yesterday Charles Wyplosz, an economics professor who has
acted as a consultant to the Commission, said that European
leaders had made grave mistakes.
What we have seen is the misuse of the euro and
of monetary union as a result of the failures of current
political leaders, he told Emerging
They should recognise that fiscal discipline has been
seriously damaged, he said.