Markets still jittery about growth prospects in the eurozone at one point yesterday sent the euro tumbling to a four-year low against the dollar, renewing fears of instability in the 16-member bloc.
The currency later bounced back slightly.
The weakness follows a €750 billion emergency package agreed to last week between the eurozone's finance ministers and the International Monetary Fund to ward off market speculation that threatened the economies of Portugal and Spain.
"The package was bold and a good move and I would have expected the markets to stabilise but speculation is rife," economist Joe Vella Bonnici said, insisting markets were not yet convinced because countries such as Italy and Spain contend with debts of about €1.2 trillion each.
Financial analyst Jesmond Mizzi said that, after the initial euphoria, markets were feeling the need for a long-term solution to the debt problems of various countries with structural changes required to cut soaring deficits.
He also spoke of a Catch-22 situation with countries taking hard decisions to curb spending and reduce deficits but this, in turn, leading to civil unrest that was fuelling uncertainty.
Spain and Portugal both announced major cuts in public spending last week as did the Greeks before them. Analysts are anxiously awaiting news next week of the cuts expected in the UK's emergency Budget on June 22, which will be the first test for Prime Minister David Cameron's new coalition government.
"The deficit-cutting measures have to be implemented but they should not lead to lower growth prospects because the only way out of the situation is higher economic growth," Mr Mizzi said, insisting confidence would take time to return to the market.
Mr Vella Bonnici said the split in the eurozone between the better-performing economies in the north and those in the south, which were saddled by huge deficits and public debt, was becoming more evident.
"Market speculators know there is a divide in the eurozone and are obviously capitalising on the matter. The problem with the single currency is that it is not backed by political, fiscal and economic union and this is evidently leading to wide disparities between member states," he noted.
The divide could exacerbate when the northern economies, especially Germany, started to grow rapidly pushing up inflation. As a result, the European Central Bank could be forced to raise interest rates to curb inflation, he said. However, while such a move would make economic sense for thriving economies it could spell trouble for the southern economies that needed low interest rates to stimulate economic growth.
Mr Vella Bonnici welcomed the EU Commission's proposal to screen government budgets before they are approved by national Parliaments.
"What the eurozone needs is not more money guarantees but better management, greater fiscal discipline and more economic integration," he said.
ksansone@timesofmalta.com