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Crisis Focus
Special
UPDATED: March 22, 2010 NO. 12 MARCH 25, 2010
The Euro's Uncertain Future
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The euro recently dipped as risks with European Union members proliferated, giving rise to warnings against a euro crisis in the near future. But is the euro doomed to fail? And what are the short-term prospects for the global economy? In a recent article for Shanghai Securities News, Tan Yalin, chief economist for Chinese economics at the U.S.-based Money Garden Corp., said the current state of the international financial market makes a future with a strong euro unlikely. Edited excerpts follow:

The pricing of the euro has never been independently regulated since its launch in the late 1990s. Instead, it has always reflected the effects of dollar strategies and maneuvers. In the past 12 years after it was officially introduced, the euro has experienced two phases of risk accumulation and will go through another two which might cause the currency to collapse.

During the first phase from 1999-2000, the euro depreciated which undermined cohesion among euro area members. The euro-dollar exchange rate had depreciated from $1.17 at its outset in 1999 to $0.82 on October 24, 2000, down 29.9 percent. The fiscal deficits within the euro zone have aggravated and the latest risks will trigger more incidents like the Greek sovereign debt crisis. The continuous depreciation weakened the foundation of cooperation among euro zone members. An opinion poll since 2003 said an increasing number of euro-zone residents are unwilling to keep the euro.

The second phase, from 2001-2009, the euro appreciated but the harmony of euro zone cooperation was impaired. The euro-dollar exchange rate reached $1.62 in April 2008 and since then stayed around $1.40. But still, about 60 percent of central banks' reserves worldwide are in U.S. dollars. The U.S. dollar remains the dominant currency of international trade, payment and reserves. In addition, the euro price did not reflect the actual value of the euro, but instead the value of dollar strategies—an inconsistency between price and value that is evidence to the dollar's advantages over the euro.

Also, the euro's appreciation did not boost the regional economy, but instead created difficulties in euro zone cooperation and economic growth. The most direct result was that Great Britain gave up its plan of becoming a euro zone member, and partnered with the United States in the euro-dollar competition.

Against this backdrop, the euro will appreciate again during its third phase (2010-11) when its institutional basis begins to collapse. The euro crisis arose after the euro began decreasing this year, but the risks will gradually intensify to eventually form a more serious catastrophe. Problems with Greece or other EU members will only trigger or catalyze a real crisis.

The EU's framework began to shake due to fiscal deficits of its members, which has directly weakened the basis for euro zone cooperation. Germany and France have already diverged on salvaging Greece, and coordination problems between member countries will escalate in the future as the fiscal deficit problems continue to proliferate.

The euro will likely depreciate again during the fourth phase (2012-13) when confidence in the currency will be ruined completely. Its price will plummet and eventually usher in the outbreak of a euro crisis. The euro will replace the dollar to bring about a new financial crisis, ending up a victim of history repeating itself.



 
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