A Critical Point for Europe （Jiang Shixue）

Greece, the first European country to fall into debt trouble, is faced with a painful decision on whether to stay in the euro zone. At present, the country is suffering the heavy blow of a triple crisis—sovereign debt, social problems and political uncertainty.

There are no regulations on how a member country can leave the euro zone, and other member countries, are hardly able to expel Greece from the monetary union. But the possibility of Greece's exit has definitely increased compared with two years ago.

U.S.-based Citibank recently predicted that over the next year and a half the possibility of a Greek exit from the euro zone will be 75 percent. The Center for Economics and Business Research in the UK deems that at least one member state—most likely Greece—will quit the euro zone in 2012.

Negative effects

Doubtlessly, there will be serious negative effects if Greece exits the euro zone. Most importantly, the Greek economy will thoroughly collapse. Austerity policies implemented by the Greek Government have dampened the momentum of Greece's economic growth. The country cannot run without outside support. Greece will definitely lose foreign aid, and a large amount of capital will retreat from the country as soon as it exits the euro zone.

The collapse of the financial sector, the lifeline of the national economy, will lead to a more serious crisis for Greece. The Paris-based BNP Paribas Bank predicted that Greece's retreat from the euro zone would result in a loss of 20 percent of GDP, and drive inflation to more than 40 percent. The United Bank of Switzerland also forecast an average loss of 9,500-11,500 euros ($11,900-14,400) for each Greek.

Even reusing the past Greek currency is not a simple thing. The whole country will have to change price tags for all goods and it will cost a lot to print new money. In fact, retreating from the euro zone cannot rescue Greece from the deep pit of the debt crisis. Greece exports few kinds of goods and its goods are not competitive in the global market. Therefore, its exports won't grow much by using a devalued drachma.

Greece's creditors will bear great losses if it exits the euro zone. Although measures such as a massive debt write-down carried out by other European countries have alleviated the debt burden of Greece, European banks and other investors still have 55 billion euros ($69 billion) in Greek sovereign debt in their hands. A Greek exit would mean that the national debt might default. Other huge debt, including $69 billion in loans Greek enterprises and individuals borrowed from international banks and 100 billion euros ($125 billion) in loans the Greek central bank borrowed from other European central banks, may also default. It is also unknown whether the International Monetary Fund (IMF) will be able to get repaid for its 22-billion-euro ($28 billion) aid to Greece.

A Greek exit will also destroy the reputation of the euro. It will bring to light the deadly defects in the euro system. Its consequences are likely to spread to other troubled countries including Ireland, Portugal, Spain and Italy, producing a domino effect.

As a result, the progress of European integration will be interrupted. The euro is a necessary step of European integration. Many other European countries are expected to join the monetary union in the future. A Greek exit will be a major setback in the process.

There are several reasons why the European sovereign debt crisis remains unresolved three years after it broke out. Since it hit Greece, Ireland and Portugal, a chain reaction has dragged more European countries, including Spain and Italy, into the crisis. The EU failed to take rapid and efficient measures to curb the debt crisis following its outbreak. The IMF, the EU and the European Central Bank have paid too much attention to austerity as a counter-crisis strategy, restricting economic growth. International credit rating agencies have aggravated fears by downgrading the credit ratings of debt-ridden countries—moves that hindered the recovery of market confidence. Last but not least, the governments of the heavily indebted countries have been unable to win public support for their counter-crisis measures.

The debt crisis has not only adversely affected the economic development and social stability of Europe, but also held back the recovery of the global economy. The IMF indicated in its latest World Economic Outlook report published in April that the outlook of the world economic recovery is dim given the lingering European debt crisis. Moreover, spillover from the euro-zone crisis has taken a toll on countries that have close economic ties with Europe including China.

Help from China

Soon after the European debt crisis erupted, there was a heated debate on whether China can and should rescue Europe. Some said China has the ability to save Europe because it has become the second largest economy in the world with huge foreign exchange reserves. Furthermore, China and the EU have established a comprehensive strategic partnership. China therefore is obligated to come to the EU's rescue. Others, however, argued China is still a developing country with over 100 million people living below the poverty line. It has neither the duty nor the capability to offer aid to the EU, whose per-capita GDP is several times higher than China's.

In fact, Chinese leaders have a clear and resolute stance on the European debt crisis.

Chinese President Hu Jintao met with European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso on the sidelines of the 14th China-EU Summit in Beijing on February 15.

"China is closely watching and supports the measures taken by the EU, the IMF and the European Central Bank to cope with the European debt problem," Hu said. China will continue to increase policy communication and coordination with the EU, enhance cooperation in the areas of economy, trade, investment and finance and engage in supportive action of the international community for Europe and the euro zone, he added.

"I believe that Europe has the capability and wisdom to overcome difficulties and embrace new development," Hu said.

Chinese Premier Wen Jiabao and German Chancellor Angela Merkel held a joint press conference in Beijing on February 3 after their meeting. With respect to the debt crisis in Europe, Wen said, "The related Chinese ministries are conducting studies and assessments on specific ways to contribute to the IMF and be more active in resolving the debt issues in Europe through the European Financial Stability Fund, the European Stability Mechanism and other channels."

Wen pointed out that Europe's own efforts are crucial. Heavily indebted countries need to make determined efforts and implement appropriate fiscal policies in accordance with their national conditions. In addition to emergency relief measures, the EU, as a whole, should continue to promote institutional and structural reforms in fiscal, financial and other aspects and deliver consistent and clear solutions to the international community, he said.

Chinese Vice Premier Li Keqiang paid a visit to EU countries in May. At a meeting with Barroso in Brussels on May 3, Li said a steady euro and a stable European economy are conducive to steady global economic growth and can benefit China as well. "China firmly supports the integration of Europe, and hopes to see a united, strong and prosperous Europe," he said.

A Greek exit from the euro zone will, of course, have an impact on China. If that happens, the value of Greek bonds that China holds will shrink a lot and China's investment in Greece will face grim challenges. Also, since Greece's exit will add to difficulties in addressing the EU debt crisis, the external environment for China's economic development will worsen.

For example, the crisis-ridden EU is unable to increase its import needs and the yuan will rise sharply against the euro if the debt crisis continues. Also, the EU's trouble will further weaken the recovery of the world economy. All these consequences are detrimental to China.

Nonetheless, the debt crisis provides an opportunity for China and the EU to promote their relations. China can help the EU through various means, such as importing more goods from EU countries, making more investment there, purchasing their government bonds and contributing more funds to the IMF. Certainly, the EU should rein in the spread of the "China threat" rhetoric, refrain from trade protectionism, cut restrictions on Chinese goods and increase technology transfers to China.

Most people in China believe that the EU, the world's largest economy, will unleash vigorousness when it extricates itself from the debt crisis. Besides, the EU's consistent efforts to improve economic governance and implement its fiscal compact will facilitate integration progress. In this sense, the EU will have a promising future. China-EU relations will also have good prospects despite the EU's current difficulties.

http://www.bjreview.com/quotes/txt/2012-06/18/content_460181.htm

（Contact Jiang Shixue: jiangsx@cass.org.cn）