As the U.S. economy struggles, an austere Europe rebounds

The stark reality of American leaders receiving warnings from their European counterparts about the need to curb spending and government deficits has been accompanied by the rising euro and falling U.S. dollar. On Monday, Aug. 2, the euro soared to a three-month high against the dollar and the U.K. pound reached its highest value in six months.

Policy decisions can and do affect the value of currencies. Look no further for a recent example than the United Kingdom and its new government’s unveiling of a fiscal austerity plan. Within a few months, the British pound has gained more than 11% in value, following a drop in May, after assuaging uncertainty among market observers about whether the U.K. government would address its troublesome deficit.

The International Monetary Fund on July 8 specifically called for the United States to intensify efforts to curb budget deficits. The 185-member international lending agency warned about a potential double-dip recession in housing, continued problems in commercial real estate and risk to the U.S. economy from the European debt woes.

"The sight of the gallows concentrates the mind," but not in Washington, D.C., or California

LISBON/BRUSSELS (Reuters) – Portugal became the latest euro zone country to announce austerity measures to rein in a ballooning budget deficit on Monday as debt-stricken Greece urged global action to curb speculation in credit default swaps.

The European Commission said it was prepared to propose the creation of an IMF-style European Monetary Fund to cope with future debt crises in the euro single currency zone.

German Chancellor Angela Merkel said she favored the idea, which she said would require a change in the EU treaty, but the European Central Bank's chief economist branded it illegal.

EU sources said finance ministers of the 27-nation bloc would discuss ways to dampen speculation in the sovereign CDS market at their next meeting on March 16.

Hedge funds have been accused of aggravating the Greek debt crisis by so-called "naked short selling" -- betting on a default without owning the underlying Greek bonds, hence forcing up Athens' borrowing costs. [nWLB9439]

Greek Prime Minister George Papandreou, who took draconian austerity measures last week to stem attacks on his country's debt, called credit default swaps a "scourge" that threatened the Greek and global economy and asked the United States to join Europe in action on the issue.