(menafn – ecpulse)
The European common currency continues to post gains against the U.S. dollar for the third consecutive week, supported by the optimism triggered on Friday by the euro zone finance ministers, who agreed to boost the firepower of the European rescue fund in order to take one step forward in fighting the long-lived debt crisis and also to shield larger economies such as Spain and Italy from the debt contagion.
The move taken by lawmakers in the euro-area region also aims to restore confidence and prevent yields on Spanish and Italian bonds from rising again, where the surge in borrowing costs has previously forced Greece, Portugal and Ireland to seek bailouts from the European Union; however, Spain and Italy are larger economies and accordingly the euro zone cannot allow any of them to follow other indebted nations into the debt-trap, which in result might threatens the existence of the 13-years old common currency.
On Friday, The euro zone finance minister after the first-day meeting in Denmark decided to boost the firepower of the European rescue fund by 200 billion euros to 700 billion euros (1.02 trillion), in a step to strengthen the defenses of the euro zone against the contagion of the crisis.
The European Financial Stability Facility and the European Stability Mechanism will form the new firewall, where European finance chiefs decided to combine both funds together in order to create a stronger and larger fund, noting that the EFSF will contribute with 200 billion, while the ESM will provide 500 billion euros in addition to other proceeds that will push the figure higher almost to 800 billion euros.
European finance ministers said in a statement after meeting in Copenhagen "all together, the euro area is mobilizing an overall firewall of approximately 800 billion euros, more than 1 trillion dollars."
The Austrian finance minister also said after the meeting, explaining the slight increase in the firepower that lawmakers had to find common grounds, saying that "we can't consider that the crisis is over. We must find a good middle way between those who seek a (maximum) firewall and those who want it kept to a minimum."
Moreover, the euro was able to hold onto the gains recorded against other majors; especially the U.S. dollar, after the Spanish government was able to pass 27 billion euros of cuts, in efforts to reduce the budget deficit and prevent the contagion from spreading into the Spanish economy, which is currently facing another phase of recession after the nation contracted for the second consecutive quarter and also as unemployment remained extremely high above 20%.
However, the question to be asked here is whether Spain will be able to reach the target of 5.3% of GDP this year and also whether the nation will be able to cut public deficit without weighing additional pressures on growth which has been downwardly moving for two consecutive quarters.
In general the focus will remain on the finance ministers' second day meeting and on what lawmakers can also bring to fight the two-year debt crisis, where the euro zone must fight hard to restore confidence and support growth to pick up this year despite the several economic challenges and pressures facing the area at the moment.