Euro falls to 11-month low amid debt worries

Stock markets in Europe tumble again as the common currency, saddled by the continent's debt crisis, falls to an 11-month low against the U.S. dollar.

Italy forced to pay 6.47% interest to sell €3 billion in bonds

Private and public sector workers take part in a demonstration to denounce austerity measures in front the National Assembly in Paris on Tuesday. Trade unions organized anti-austerity protests across France, parallelling rallies in other European countries, which have been hit by a debt crisis. (Charles Platiau/Reuters)

Stock markets in Europe tumbled again Wednesday as the common currency, saddled by the continent's debt crisis, fell to an 11-month low against the U.S. dollar.

The euro sagged 0.5 per cent to $1.2975 US by mid-afternoon, the first time it has traded under $1.30 since January, in a fresh sign that Europe's deal last week to enforce more budgetary disciplines on the 17 eurozone countries is meeting with skepticism in the markets.

The major continental stock markets fared poorly. Germany's DAX index closed down 1.7 per cent, while the CAC-40 in Paris dropped 3.3 per cent. London's FTSE 100 was off 1.1 per cent.

Meanwhile, Europe's unresolved debt crisis kept the pressure on its indebted governments, with Italian borrowing costs rising again. The Italian government paid 6.47 per cent interest to borrow €3 billion ($4 billion Cdn) for five years at a bond auction, up from 6.30 per cent just a month ago.

"It was no secret to anyone that the currency union would run into these problems sooner or later. It’s amazing it took so long to rupture," Bank of Montreal chief economist Sherry Cooper wrote in a note.

Cooper said the debt crisis isn't the real issue in the eurozone, and if it were, stronger fiscal integration of the 17 countries and deficit cutting would solve it.

"Productivity differences among the 17 member countries are an even bigger problem," she wrote. "Germany is by far the most productive economy in Europe and the gap has widened with the restructuring of its labour markets over the past decade.... That gap has left Germany with a large intra-European trade surplus while most other countries run deficits."

Possible solutions are further government austerity measures (but better education) and lower wages, or "a protracted period of recession," she said. Another risky possibility is that Greece or other flailing countries could drop out of the euro, though it's unclear whether that might economically devastate them even more.

One solution the eurozone's weaker economies won't be able to rely on, for now, is issuing joint bonds with the other countries. German Chancellor Angela Merkel repeated her opposition to the concept on Wednesday in a speech to her country's legislators.

That means Italy, as well as Spain, will continue to have to pay steep interest rates on new bond issues. Rates nearing seven per cent are considered unsustainable for those countries' treasuries.

U.K. unemployment spikes

In the broader eurozone economy, industrial production slipped 0.1 per cent in October, the EU's statistical office reported, in a further sign of weakness many think will lead to a recession.

Meanwhile in Britain, which is outside the euro, figures showed unemployment hit its highest level for 17 years, with women and young people bearing the brunt of the deepening jobs crisis as the country's austerity measures and economic weakness begin to bite.

Germany also reactivated its financial sector rescue fund in response to new questions about how its banks can cover their capital needs amid the continuing eurozone debt crisis.

Chancellor Angela Merkel's spokesman, Steffen Seibert, said the cabinet decided to reopen the €360 billion ($485 billion) fund, first established at the height of the 2008 financial crisis. European authorities have determined that German banks require a total of €13.1 billion in new capital to comply with tougher new requirements. The country's second-biggest bank, Commerzbank AG, has been told it needs €5.3 billion.

With files from The Associated Press