The euro zone came under pressure again on Friday as the euphoria over a massive 750 billion euro (nearly one trillion-dollar) financial bailout package put in place five days ago dissipated and worries about Europe's ability to contain its fiscal problems returned to the financial markets.
The euro dropped to an 18-month low of 1.24 against the dollar on fears that the austerity measures planned by the debt-ridden nations of the euro zone might stifle economic growth.
There is also concern among investors about these nations' ability to implement severe spending cuts amid mounting public protests.
Global shares also dropped sharply, while gold soared to an all-time peak of 1,250 dollars per ounce as investors flocked to their traditional safe haven.
Market analysts said there are new worries about the impact of the austerity measures planned by Greece, Portugal and Spain on global economic growth.
Investors are also concerned about the effectiveness of the 750 billion euro bailout package to prevent the debt crisis in Greece from spreading to Portugal, Spain and Ireland, which are seen as the most vulnerable markets.
Stock market indices across Europe took a dive, led by the Spanish Index, which dropped by 6.6 per cent, while the UK's main FTSE Index fell by 3.1 per cent, France's Cac by 4.6 per cent and Germany's Dax by 3.1 per cent.
Bank stocks were among the worst hit in Friday's decline and all main European banks reported losses.
The financial markets had responded to the 750 billion euro loan guarantee deal for the euro area with strong rallies. The bailout package was approved last Sunday by the European Union and the International Monetary fund to prevent the debt crisis in Greece from spreading to other countries with high levels of debt and budget deficits in the euro zone.
"The rescue package helped to calm down the markets, but the fear of the Greek debt crisis spreading to other countries in the euro zone persists," one market analyst in Frankfurt said.
Some commentators criticised Josef Ackermann, the CEO of Deutsche Bank, Germany's largest bank, for "pouring oil into the fire" by publicly expressing doubts about Greece's ability to fully pay back debts amounting to more than 300 billion euros. In a German television interview, Ackermann said Greece has to make enormous efforts to pay back its debts and he has doubts whether that country will ever be in a position to do that.
Referring to Ackermann's comments, a German government spokesperson said, "It is of no use and there is no occasion" to speculate on the capabilities of a euro zone member nation to pay back its debts.
The Greece government's economic consolidation programme "is realistic", the spokesperson said.
Greece is already receiving a separate 110 billion euro bailout fund from the European Union and the IMF, which was released on May 7.
Some analysts expressed hope that the renewed pressure on the euro may encourage reluctant EU member nations to accept the European Commission proposals to coordinate their budgets with the commission before they are presented to national parliaments.
The commission made its proposals on Wednesday as part of a new initiative to strengthen economic cooperation within the 27-nation bloc.
Several EU member nations are wary about Brussels taking control over their national budgets and regard the commission's proposal as an encroachment on their national sovereignty.
But the Commission's President, Jose Manuel Barroso, and the Commissioner for Economic and Monetary Affairs, Olli Rehn, said their plans are aimed at closer and early coordination of budget policy and the rights of national parliaments will remain intact.
They said their proposals are intended to prevent another debt crisis in the euro zone by reinforcing economic policy coordination and fiscal discipline.
Their proposals included new sanctions to enforce compliance with EU budget rules and close monitoring of the competitiveness of member nations.
The commission also suggested that the three-year limit envisaged for the 750 billion euro financial rescue package for the euro zone should be extended indefinitely.
Huge sovereign debts of the EU member nations, high budget deficits, low economic growth and growing unemployment are seen as the root causes of the present debt crisis in the euro zone.
Under the EU rules, budget deficits must be kept below three per cent of the GDP and debts should not exceed 60 per cent of the GDP.
But the majority of EU member states have repeatedly violated these rules and this has caused the financial markets to doubt the credibility of the EU budget rules.
