The Euro is unlikely to collapse （Jiang Shixue）

The ancient Greek playwright Sophocles once wrote, "No one likes a messenger who brings bad news." Like it or not, bad news came to Greece again on June 13. Standard & Poor's downgraded Greece's credit rating, causing upheaval in the financial market in Europe and elsewhere. According to the Financial Times, Greece is now the lowest-rated sovereign in the world, below Ecuador, Jamaica, Pakistan and Grenada.

No one really remembers how many times credit rating of Greece has been lowered by international rating agencies, but this latest bad news tells us that the debt crisis in Greece and the downgrades that come with it are far from over.

Worse, the news has led many people in Europe and elsewhere to reaffirm their prediction that the euro will soon collapse. Even a few Chinese scholars are doubtful of the euro's fate.

As a matter of fact, skepticism over the euro has appeared ever since common currency's inception more than a decade ago. Even such prestigious fatigue as the later Nobel Prize winner Milton Friedman said that the common currency of Europe would be short-lived. When Estonia joined the euro zone on January 1, 2011, some commentators said that Estonia has got the last ticket onto the Titanic.

Will these people's predictions be as spot-on as Paul the Octopus, who correctly picked so many World Cup winners last summer? The answer is no, for three reasons:

First, dropping the euro would mean political catastrophe for Europe. Integration reflects the common will of mankind to seek unity and cooperation. Europe has been the vanguard in this regard, and the birth of the euro was the glorious result of the integration process. Therefore, it is logical to reason that the collapse of the euro would mean the end of the euro zone, and doom of the euro zone would greatly jeopardize European integration. And as German Chancellor Angela Merkel said, the demise of European integration is the same as the death of the continent. So it is hard to imagine that European leaders would dare to let the euro die.

Second, discarding the euro would also entail a huge economic cost for the euro zone members. Since its inception, the common currency has reduced transaction costs and brought many advantages such as decreasing long-term interest rates and maintaining price stability. It was said that a traveler with 100 Francs in his pocket who bought nothing on his trip would still arrive home to find he only had 50 Francs, as he had to exchange money in every European country he visited. The euro fixed that problem, and its collapse would likely bring it back.

Third, the debt crises in Europe's periphery countries will not dismantle the foundation of the euro. Indeed, the current debt crises in Greece, Ireland and Portugal are the most serious test of the euro yet. However, the size of these countries' economy is quite limited. Therefore, as long the core nations such as Germany and France are economically sound, the euro will be able to weather the storm.

Some people suggest that the way out of the debt crisis is one of the following two choices: Either Greece should withdraw from the euro zone voluntarily, or the euro zone must kick Greece out. By going back to its old currency, the drachma, it is argued, Greece would be able to regain control of its monetary policy, allowing it to stimulate the economy by injecting cash into stagnant markets and encouraging exports through devaluation.

Both these proposals are impossible. They would not only weaken the political base of the euro, but would also create economic catastrophe for Greece. Before the drachma could replace the euro, Greece would need to make a slew of preparations such as printing money, changing price tags and readjusting bank accounts. This homework would take six to 12 months. During this period of time, capital would flee Greece, throwing the Mediterranean nation into even greater chaos.

That said, it does not mean that the euro is a perfect currency. Needless to say, the root cause of debt crisis in Greece is found in its own yard like over-spending, lax macroeconomic management, slow growth of productivity, weak competitiveness, etc. The euro's inherent shortcoming, i.e., a common monetary policy with an individual fiscal policy, should also be blamed. So the euro zone member nations' challenge ahead is how to deal with this asymmetric relationship.

Another challenge for the European Union is how to strengthen economic governance. Enhanced economic governance is expected to act as a preventive measure to stop bad policy-making before it turns into a crisis. It has become a well-recognized fact now that the debt crisis in some of the EU countries has exposed the deficiency of their economic governance. On September 29, 2010, the European Commission adopted a legislative package containing the most comprehensive reinforcement of economic governance in the EU.

It is expected that the EU and the IMF will step up their efforts to bailout Greece. As the existence of the euro benefits multilateralism of an international monetary system, China should assist Greece and the EU by purchasing bonds. A friend in need is a friend indeed.

（This article was originally published at http://www.china.org.cn/opinion/2011-06/19/content_22813502.htm)