Save euro, save globalization

By Xiao Gang

China Daily, February 11, 2011

With economic and financial integration, the trade volume within the euro-area countries has surpassed 1 trillion ($1.37 trillion) a year, showing the huge development potential of the common market. At the same time, the European countries have benefited significantly in the absence of foreign exchange rate fluctuations and the colossal reductions in transaction costs, and the euro has boosted a freer flow of talent, funds, technologies and other resources. Under these conditions economic development and employment has been promoted across the eurozone.

The euro has also brought price stability. The European Central Bank clearly defined an annual inflationary target in the euro area below 2 percent in the medium term.

For the past 12 years, the average annual inflationary rate has been 1.97 percent. As a result, millions of European citizens have seen their purchasing power and the value of their savings preserved.

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.