What was in effect, a reaffirmation by European finance ministers of previous commitments to increase the size of the euro zone’s bail out fund, boosted the Euro against a bullish USD as the markets closed Friday. The EUR/USD was up 0.30% on the day, trading at 1.3341 as the conference in Copenhagen ended with Jean-Claude Juncker, the soon to be replaced chairman of the Eurogroup, cancelling a scheduled press conference because he was angry with the Austrian finance minister Maria Fekter. She exited the meeting early to prematurely announce to the press the decision on the firewall. However, it wasn’t all petty schoolchildren actions, the Eurozone rescue fund was increased to 800 bn euros, which was the maximum amount the German Chancellor Angela Merkel said she could get though the German parliament. This comes about because there is an overlap between the start of The European Stability Mechanism (ESM) in July 2012 and the phasing out of the existing bailout fund – the European Financial Stability Facility (EFSF) – which has so far come to the rescue of Ireland, Portugal and Greece twice.
The combined lending of the two funds will stand at 800 bn from the middle of the year, although many are speculating the funds may well be needed for Spain and possibly Greece for a third time. Spain announced 27bn euros worth of cuts to its budget in attempt to reduce its deficit. Public sector salaries will be freezed and departmental budgets reduced by 16.9% in what were Spain’s toughest austerity measures in history. Prime Minister Mariano Rajoy agreed with the European Commission last month to cut Spain’s deficit from 8.5% to 5.3% of GDP in 2012 which has prompted the cuts. Gas and electricity bill are rising 5% and 7% respectively at a time when unemployment is at record levels. Between the 16-24 year olds age group, the figure stands at 48%, one of the highest in the region, making analysts nervy about how much pressure Spain may put on the already beleaguered Euro in the not so distant future.
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