News Analysis: Bumpy road ahead for euro

11:15, January 01, 2011      

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In the shadow of the sovereign debt crisis, the eurozone will welcome Estonia as its 17th member on Saturday.

However, the addition does not dispel concerns for the future of the euro, which is in great trouble caused by the Greek debt crisis.

Many see a bumpy road ahead for the single currency in its second decade after coming into being on Jan. 1, 1999.

VOLATILE 2010

At the end of 2009, a debt crisis hit Greece immediately after the global financial upheaval. The crisis worsened step by step despite continuous denials by the Greek government of its problem and assurances from top European Union officials.

The first summit called by the president of the European Council, Herman Van Rompuy, on Feb. 11 was hijacked by Athen's debt problems. The EU leaders were preoccupied with the Greek debt crisis at their meeting, which was initially supposed to focus on drawing an economic blueprint for the 27-member bloc for the next 10 years.

The meeting, however, didn't result in any immediate aid to Athens.

"Euro area member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole," said a joint statement from the eurozone countries.

However, the pledge by eurozone members failed to assure the market and the Greek government was forced to ask help from its fellows and the International Monetary Fund.

On May 10, EU finance ministers agreed on a provisional rescue mechanism worth up to 750 billion euros (1,035 billion U.S. dollars) to prevent the spread of the crisis and restore confidence in financial markets.

In November, Ireland followed the same path as Greece, dragged down by its troubled banking sector.

The 85-billion-euro (113-billion-dollar) aid package to Dublin did not dispel fears of contagion of the crisis, which many said could inevitably spread to peripheral countries such as Portugal and Spain.

BUMPY ROAD AHEAD

Faced with both short- and long-term challenges, the euro faces a bumpy road ahead, analysts believe.

It will be tough for the euro, especially in the early years of its second decade. In the short run, the sovereign debt crisis is expected to worsen.

According to the estimate of UniCredito Italiano, eurozone countries will have to raise 560 billion euros (744.8 billion dollars) in 2011 to finance their debt, which is the highest since the birth of the euro. Portugal alone will need 20 billion euros (26.6 billion dollars) in the first half of 2011.

To fight the crisis, eurozone countries have launched large-scale austerity measures aimed at reducing their budge deficits to safe levels in three to four years. But there is a risk that the measures may hurt the countries' slow recovery and even drive some into recession.

In the long run, the recovery of the euro will be affected by some negative factors, such as an aging population, climate change and a lack of competitiveness. The debt crisis will further deepen the imbalance among euro member states.

Fabian Zuleeg, chief economist of the European Policy Center, warned that if the imbalance, the underlying reason of the debt crisis, could not be addressed, it may sow the seed of another crisis.

However, the economist said the eurozone will not fall apart as predicted by some euroskeptics. The reason lies in the fact that it would be disastrous for eurozone countries in both a economic and political sense to quit the single currency.

For the 17 members of the eurozone, there is no choice other than to deepen their integration and address the challenges together.

Source: Xinhua
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