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 summit.
We are creating a system, so that markets can see that we mean what we say, and not only say what we mean, she said.
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 fund regulations.
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 Markets.
They should recognise that fiscal discipline has been seriously damaged, he said.