[Xiao Gang] Euro’s destiny tied to the future of globalization

In the wake of Europe’s woes, more and more voices from European countries and beyond have been calling for the euro to be abandoned. Surveys in France show that more than 35 percent of the respondents desire the reintroduction of the French franc, and in Germany there are strong voices calling for the return of the Deutschmark.

From historic, economic, political and global perspectives, the destiny of the euro is not only closely associated with Europe’s monetary union and the eurozone itself, it is also tied to the future of globalization.

To some extent, saving the euro is akin to saving globalization. The creation of the euro can be seen as one of globalization’s greatest achievements over the past decades.

The process of European integration began with the establishment of the European Coal and Steel Community in 1951, and the signing of two treaties in Rome on March 25, 1957 by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. The treaties established the European Atomic Energy Community and the European Economic Community.

The Merger Treaty signed in Brussels, Belgium, on April 8, 1965 combined the executive bodies of the European Coal and Steel Community, European Atomic Energy Community and the European Economic Community into a single institutional structure.

With its members growing and its geographical scope broadening, the European Union had 15 member countries by 1997.

Seven years later, the EU reached a new milestone when it formally admitted 10 new members. This move added 75 million people, created the world’s largest free-trade bloc and ended the continent’s division.

The initiative to build Europe’s monetary union emerged in 1970, but it wasn’t until 1992, when the Maastricht Treaty was signed, that the roadmap and timetable for creating a single currency were determined.

The euro has been largely successful in many areas over the past 12 years since its debut. The EU is a great example of an integrated security community with a single economy. It has drawn on historic lessons and ended the wars among European countries. Moreover, the single currency is dedicated to liberal democratic governance and a cross-border free market.

With economic and financial integration, the trade volume within the euro-area countries has surpassed 1 trillion euros ($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 12 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. 

By Xiao Gang

Xiao Gang is chairman of the board of directors of the Bank of China. ― Ed.

(China Daily/Asia News Network)