Economy

Save euro, save globalization

By Xiao Gang (China Daily)
Updated: 2011-02-11 07:40

More importantly, the euro, established as the second international currency, has played a key role in the international monetary system, allowing investors to diversify their portfolios and disperse risks in the global markets.

It is hard to imagine what would have happened to the world without the euro.

Few people deny the launch of the euro was incomplete when it was designed. Even during preparations for the launch of the single currency, the situation in EU countries was unsatisfactory: the average unemployment rate was about 9 percent, the inflation rates for some countries were 5-10 percent, and the fiscal deficit-to-GDP ratios for some countries surpassed 10 percent.

Against this backdrop, the EU countries eventually agreed on a single currency, with convergent standards adopted in terms of inflation, fiscal deficits, interest rates and exchange rates.

The current eurozone sovereign debt crisis was partly the result of fiscal misconduct and a lack of punishment, for the EU has a single central bank but no common treasury. The twelve newest EU members, whose combined economies are less than 10 percent of the entire region, have poorer performances and smaller populations than the previous 15 EU countries, so all the different interests make it difficult to reach agreements on policy decisions.

In fact, even in a country with its own currency, unbalanced development in regions is unavoidable. Political and fiscal union can be helpful for governments to equalize economic development in different areas and transfer technologies to backward areas.

The euro is indeed in danger, and the risk definitely seems more systemic. In eurozone countries, not only do national treasuries face a difficult 2011, but also many banks are thought to need a huge amount of refinancing over the next three years. The only way to avoid a eurozone break-up is strong political leadership.

The good news is we have heard powerful pledges from Europe's political leaders at the annual meeting of the World Economic Forum in Davos that they want to do whatever it takes to save the euro. The European Financial Stability Facility is due to be replaced in 2013 by a permanent mechanism. This January saw the birth of four pan-European financial regulators, in particular the European Systemic Risk Board, set up to monitor and strengthen the single market. At the upcoming summit in February, greater policy coordination could be agreed upon by the heads of the EU countries.

China and the EU have become more than each other's most important trading partners; they are also strategic partners in a comprehensive way. To save the euro is in the interests of China. On different occasions, Chinese leaders have repeatedly expressed their strong commitment to supporting European financial stabilization, including continuing to buy the bonds of the countries at the center of the sovereign debt crisis and increasing investments in the eurozone. This has greatly increased confidence in the euro.

"Crisis" can mean both challenges and opportunities in the Chinese language. The time has come for the eurozone governments and the rest of the world to use the current crisis as an opportunity to deepen economic integration and currency union. In doing this, globalization, which represents the best hope of raising living standards in all nations, can be safeguarded.

As French President Nicolas Sarkozy said, "Europe will never abandon the euro. Never. Euro spells Europe, and the euro is Europe."

Although there is no guarantee that the euro will never collapse and will survive in its current form, we are still optimistic about the fact that the current wave of globalization will not be reversed.

The author is chairman of the board of directors of the Bank of China.

China Forum