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Print Edition> Business
UPDATED: May 21, 2010 NO. 21 MAY 27, 2010
Crisis Focus: Debt-Ridding Options

The sovereign debt crisis hovering over Greece and some eurozone countries has sparked concerns of a recession on continental Europe. Han Zhiguo, head of the Beijing Banghe Fortune Research Institute, analyzed four possible ways of dealing with the crisis in an article published in the Economic Information Daily. Edited excerpts follow:

The EU cannot resolve the sovereign debt problem with one stroke of the pen by pumping 750 billion euros (nearly $1 trillion). It might be an even more arduous task for the euro zone to ride out the crisis than the journey currently facing the United States. Judging from the current situation, euro-zone countries could be confronted with the following four possibilities.

To attend to the crisis as quickly and easily as possible, euro zone countries, or the EU at large, and the IMF must work together to help indebted countries resolve their monetary issues. The reasons for doing this are twofold: If they do not step in, the ripple effect of the crisis-stricken might soon jeopardize the economic interests of the EU, or a complete collapse of the euro zone as a whole; and, under the current circumstances, with hedge funds shorting the euro and stocks in the European markets, the slower these two organizations respond, the more damage will be dealt to euro zone countries. But inconveniences for taking action are that nobody is sure how much debt the crisis-stricken countries actually hold, and that the bailout plans may encounter opposition from citizens of the rescuers and those being rescued.

The second option is to kick those debt-laden countries out of the euro zone. But there is no mechanism in the euro zone system to expel members. Withdrawing from the euro zone would deal a heavy blow to those countries, as they would have to face high interest rates and substantial depreciation of their own currencies. Large-scale recession and unemployment would then take their tolls. More importantly, according to the Treaty of Maastricht, withdrawal from the euro zone means withdrawal from the EU, dealing a deadly blow to any country that intends to take such extreme actions.

The third rescue method is massive international aid. If major economies raise their holdings in the IMF a larger scale bailout for Greece can be arranged. The biggest flaw is that there is no legitimate and effective security guarantee for the bailout fund and it is inconsistent with IMF regulations. Unless the last resort fails, an international-scale bailout is unlikely.

The last possibility is a complete crash of the euro and the euro zone. If the debt crisis breaks out, affecting the EU nation one after another to an incurable extent, the only choice would be to terminate the euro and the euro zone. The euro might continue to depreciate against the U.S. dollar, probably down to 1-to-1 or even less. Under such circumstances, Germany and France would suffer tremendous economic losses, and Germany may take the initiative to ditch the euro. Since Germany is the biggest economy in Europe, its retreat would signify a Waterloo-like defeat of the euro zone. If this happens, the euro will all but vanish.

The collapse of the euro or the disintegration of the euro zone is not an impossibility and must be guarded against—less it become a reality.


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