The world economy as a whole is recovering, but a pressing crisis might be in the making in Europe where the fiscal conundrum is taking its toll. Tan Yaling, Director of the China Forex Investment Research Institute, discussed this issue in an article recently published in the Shanghai Securities Journal. Edited excerpts follow:

The global economy is regaining some of its lost ground, but that doesn't mean the world has left the sweeping financial crisis completely behind it. Actually, the real financial crisis may not have even arrived yet and is likely to break out in the future—in Europe, but not the United States. The causes of this potential disaster are threefold.

First, the global financial markets have sown the seeds of crisis.

The U.S. dollar has been losing value, which led other currencies, especially the euro, to strengthen. The euro has been seriously overvalued. While the economy of the euro zone is taking a heavy blow, the price of the euro is going up. Once the price bubble busts, a credit crisis of the euro will follow.

Meanwhile, the euro zone countries have yet to make coordinated efforts to address the fiscal problems as their policies are largely decentralized and there are no efficient solutions and proper treatments of problems. The euro zone's question lies in its system, which lacks effective discipline and guarantee. Measures to heal the fiscal pains have largely focused on capital injections and the scale of fiscal deficits, instead of on repairing the systems.

Second, cohesion within the euro zone seems to be falling apart. It is reported that more than 60 percent of residents in major euro zone countries are reluctant to hold euros, presenting risks of a collapse to the currency.

The German economy stands out while other European economies stagger. In terms of economic recovery, Germany is apparently racing ahead of other euro zone countries. Exports of the country, in particular, are quickly recouping in part because the Japanese yen appreciated, putting a dent in Japan's exports and providing new opportunities for German goods to sell.

Currently, the euro zone is confronted with some daunting challenges. Nearly three years after the financial meltdown, the United Kingdom has completely given up plans to join the euro zone while some Germans think about leaving. Worse still, contradictions between the euro zone countries are intensifying.

Third, the world has come to the edge of another crisis. The U.S. Federal Reserve has adhered to the quantitative monetary easing policy, but the U.S. interest rates are expected to stage a sharp run-up, catching the financial markets off guard. Besides this, the euro appreciation may get out of control, adding to financial risks already facing the euro zone.

While policy coordination of their problems comes to a standstill, the euro zone countries may turn to their last resort—to massively print their own original currencies. And this will only lead to a failure and abandonment of the euro.