An unprecedented declaration of concern over the level of the euro from 11 European finance ministers, and hints of possible intervention by the Central Bank, failed to halt the slide of the beleaguered single currency yesterday.
The financial markets reacted with a mixture of disappointment, scepticism and confusion to the declaration from ministers of the 11-nation eurozone, who expressed "common concern" about the level of the euro and promised to "speed up" structural reforms.
European politicians and bank officials have proved powerless to prevent a 24 per cent fall in the currency's value, and yesterday's co-ordinated effort was no exception.
The relentless run on the currency has taken place despite predictions from Brussels that by 2001 growth in Europe will be higher than that of the United States. The European Commission expects gross domestic product, both throughout the European Union and within the euro-zone, to hit 3.4 per cent this year, falling back to 3.1 per cent in 2001.
With mounting concern in European capitals, the declaration from euro-zone finance ministers was intended to convince the markets of their political determination to defend the euro. Finance ministers have made two previous statements on the euro but these were relatively anodyne and stressed the view that the currency was under-valued.
Yesterday ministers, who hoped to reassure the markets that economic reform is continuing, went much further, saying they were "determined to speed up ongoing fiscal consolidation and structural reforms". That included suggestions, but no formal agreement, that the proceeds of mobile phone licences and other windfalls could be used to reduce national debt.
Moreover, the prospect of Central Bank intervention to shore up the currency emerged more clearly than ever in a series of comments from finance ministers. In pre-agreed answers to journalists' questions, the Portuguese Finance Minister, Joaquim de Pina Moura, and his French counterpart, Laurent Fabius, sang from identical hymn sheets, saying the mechanism for intervention "exists and is available".
"On the subject of intervention, we have said that it is an instrument which is available," Mr Fabius said in an apparent warning to traders to take note.
However, yesterday only emphasised the practical difficulties of communicating a co-ordinated message to the markets, which promptly depressed the value of the euro. The currency had rallied earlier to 90.45 US cents but was later marked down to 89.51 cents because traders had hoped for a formal statement mentioning the possibility ofintervention.
One European finance ministry official said that the markets had "misunderstood" yesterday's developments and argued that it would be foolhardy to mention the prospect of support for the currency in a formal statement.
To complicate matters, the decision-making process leading to intervention is fuzzy. Responsibility for managing the euro rests with the independent European Central Bank (ECB), although its duties, enshrined in treaty, are to set policy that will control inflation and not to guard the value of the euro. Finance ministers have an input into any decision to intervene either to prop up or reduce the value of the currency.
Several ministers are thought to favour support for the euro rather than the alternative - a further rise in interest rates, which are now 3.25 per cent.
In another development, European finance ministers agreed to double the ceiling on the ECB's foreign-exchange reserves to 100bn euros, giving it a larger war chest to fend off speculative attacks on the euro should it decide to do so. Germany's Finance Minister, Hans Eichel, said it was "appropriate" that the long-awaited boost in the reserves limit came as the EU tried to show it was not indifferent to the euro's plunge.
Also yesterday, EU finance ministers picked the French Treasury director, Jean Lemierre, as their candidate to head the London-based European Bank for Reconstruction and Development.Reuse content