German Chancellor Angela Merkel called for tougher regulation of stock, bond and currency traders Wednesday, saying the future of the euro itself is at stake.
Merkel urged lawmakers in Germany's lower house to pass the country's share of a new $1 trillion US eurozone rescue package.
Defending the currency is "about no more and no less than the preservation of the European idea," she said.
"That is our historic task; if the euro fails, then Europe fails," Merkel told legislators.
"The euro is in danger — if we do not avert this danger, then the consequences for Europe are incalculable, and then the consequences beyond Europe are incalculable."
German lawmakers are expected to vote on the rescue package on Friday.
The euro rose Wednesday as traders bet the European Union would buy euros to support the currency. Late in the afternoon, it was trading at $1.2406 US in New York, up 1.7 per cent from $1.2202 Tuesday, when the currency had touched four-year lows.
Merkel also called for a crackdown on government borrowing to contain the continent's financial crisis.
Germany's financial regulator abruptly announced on Tuesday a ban on naked short-selling of eurozone government debt and shares of major financial companies in an effort to curb excessive speculation.
Short selling an asset is a bet that its price will fall. The speculator borrows the asset and sells it now hoping that by the time the asset must be bought in order to pay back the loan, it will be cheaper. The investor profits by the difference in prices.
Naked short selling involves not borrowing the asset first. It is illegal on many markets and not a widely used practice, but some legislators have blamed speculators for pushing down the values of currencies and, in turn, pushing up government borrowing costs.
Seen as act of desperation
That fact led markets to suspect that Germany's move was an act of desperation, that regulators were grasping at straws to stem the crisis of confidence over the ability of European governments to pay off their heavy debt amid slow growth.
"Considering European equities are down over two per cent across the board and the euro hit [another] four-year low, I don’t think Germany’s new rule was particularly effective," said Benjamin Reitzes, economist at BMO Capital Markets.
Andrew Pyle, a wealth investor with ScotiaMcLeod, called it bad policy.
"As much as the so-called eurozone debt crisis has been hyped into something on par with the financial sector meltdown of 2008, it’s not," he said.
"And so Germany’s decision to implement (on its own) a ban on naked short selling had the opposite effect on markets — it destabilized them."
Fears some governments may eventually fail to pay all they owe, or will have to cut back so severely that their economies sink into prolonged recessions, have weighed on stocks and raised concern over whether the 16-country eurozone might eventually break up.
The rescue package attempts to calm those fears by removing the possibility of imminent default, though it does little to address the underlying debt issue.