By Ambrose Evans-Pritchard
The euro has suffered its sharpest drop in four years as a blizzard of weak data from Germany, Belgium, France, and Spain spark fears that economic contagion may be spreading from the Anglo-Saxon world to Europe.
three times since October
Spain's business federation warned that Spanish unemployment will rise by 500,000 by the summer unless the government takes "valiant measures" to offset the housing and construction crash. "For every dwelling not built, two workers will lose their jobs," said the group's president, Gerardo Diaz Ferran.
The country's credit group ASNEF said the volume of personal loans had dropped 30pc in the first quarter, the worst performance since the country's financial crisis in the early 1990s.
Troubling data in Spain has been building for months, but investors have tended to focus on Germany as a proxy for the whole eurozone. A shock drop in Germany's IFO business confidence index yesterday caused an abrupt change of mood in the currency markets.
The euro plunged to $1.5646 against the dollar, down from its all-time peak of $1.6018 on Tuesday. It is still 27pc above its level two years ago.
The German data follow a slide in the Belgian index, which captures crucial port activity in Antwerp. The headline confidence figure fell from -7.4 in April from plus 1.2 in March, with a dramatic slump in the export order books to -14. This is flashing near-recession warnings.
David Owen, an economist at Dresdner Kleinwort, said Europe would soon be engulfed by the twin effects of a "collapse in export volumes" and a slow motion credit squeeze. "The wheels are coming off the eurozone economy," he said.
BNP Paribas warned clients yesterday that the "decoupling story" was no longer credible. "We see Europe in the early stage of a credit crunch, and if we are right credit supply will shut down," it said. Key governors of the European Central Bank began to back away from their hawkish stance of recent weeks, clearly disturbed by the market perception that they are mulling a rate rise to choke off price rises. Inflation has reached a post-EMU high of 3.6pc on surging oil and food costs.
Jean-Claude Trichet, ECB president, went out of his way yesterday to brief journalists that "sharp" currency moves had "possible implications for financial and economic stability", a coded threat of co-ordinated intervention by world central banks.
The comments caused a second scramble for dollars in mid-day trading as speculators rushed to cover "short" positions against the greenback.
The ECB is under heavy pressure to soften its rhetoric from both France's president Nicolas Sarkozy and Italy's premier Silvio Berlusconi, though the pair have so far stopped short of invoking treaty powers to force a change in the exchange rate - at least in public.
The EU-wide lobby BusinessEurope said: "The strong euro is alarming and in particular the speed of its appreciation since the start of 2008 is a key concern for European companies."
France is succumbing to the slowdown. Insee business climate index fell harder than expected in April to 106, from 108 in March.
Eric Chaney, Europe strategist at Morgan Stanley, said the April survey by French corporate treasurers was "alarming", pointing to distress in the financial system. "Let's call a spade a spade, some sort of credit crunch is unfolding in the funding of French companies," he said.
The IMF has cut its eurozone growth forecast three times since October and is predicting 1.4pc growth for the bloc this year and 1.2pc next year. It warned in its regional report this week that Europe will suffer 40pc of the entire $940bn global losses stemming from the credit crunch, with losses of $123bn faced by European banks alone.