Europe should reflect on euro's Great Leap Forward

By Tang Shuangning (Global Times)

16:35, September 29, 2011

Edited and Translated by People's Daily Online

European debt crisis is not regional 

The global economy is again in danger three years after the collapse of Lehman Brothers. In the second quarter of 2011, the world economy experienced its first fall since the first quarter of 2009. The economic growth was slower than expected in both the United States and Europe, and Japan, the world's third largest economy, has not quite made it out from under the shadow of the real estate and stock market bubble that burst 20 years ago. 

What is more, the danger of a debt crisis in the Unites States has not been relieved, while a new European debt crisis has emerged. Currently, all the so-called PIIGS — shorthand for the euro zone countries hit hardest by the financial crisis Portugal, Italy, Ireland, Greece and Spain — owe a total debt of three trillion euros, 50 percent of which face default risk, much more than the loss of 600 billion euros due to Lehman's collapse. 

Debts of these countries include loans of 1.8 trillion euros from banks in 16 European countries to Italy and Spain, as well as loans of 900 billion euros to Greece, Ireland and Portugal. If Italy and Spain default, it would be a deadly strike to the European banking system. The implications may extend to the global financial market and eventually impact the global economy. Moreover, a new round of global financial and economic crisis may be triggered. The worsening European debt crisis is not a merely "regional crisis, “but is highly correlative and contagious. 

The birth of euro like "political image project" 

In retrospect, the birth of the euro in 1999 is somewhat similar to the Great Leap Forward in China in the 1950s. Putting European countries with different economic development speeds, political systems, cultures and mentalities into an economic system with a unified currency and monetary policies seems to indicate "entering an advanced stage of communism," but it is nothing but a "political image project." Greece was able to issue bonds and borrow money at an interest rate as low as Germany when its economic situation was good and the crisis had not broken out. 

All countries in the euro zone have been indulged in fantasy that they could live a luxurious life, have a free ride and eat from the same pot. The enjoyment obtained by borrowing money cannot be sustained however. Once the economy starts to decline and leads to financial turbulence, PIIGS would not be able to support the current situation, and the contradiction between the unified monetary policies in the euro zone and the fiscal policy differences of member countries would be thoroughly exposed. 

European countries should be wary of egalitarianism

Winston Churchill said that democracy is not perfect, but it is the best form of government available. In fact, the problems concerning political systems vary from country to country and from time to time. In order to win more votes, politicians in the so-called democratic countries such as the United States and certain European countries vie with one another and keep promising higher salaries and greater social welfare. 

It would be understandable if their countries had adequate financial capability. It would be irresponsible if the politicians expected to fulfill their election promises by borrowing money from abroad rather than by promoting the economic development of their countries. Western politicians and financiers should draw lessons from the contradiction between increasingly expensive welfare programs and extreme democracy caused by their irresponsible behavior. 

A debt-based economy cannot last long. The United States and PIIGS countries can no longer maintain their high consumption levels and expensive welfare programs by borrowing from abroad. They should make efforts to slash their debt and deficit spending, and tell their people to live within their means. 

Euro zone countries which made the mistake of the "great leap forward" should learn from China's economic principle of "readjustment, consolidation, filling out and raising standards" carried out in the early 1960s. Euro zone countries should perform a "surgical removal" of the "financially dead" Greece, and force the country out of the euro zone if it defaults on its debt. 

The "surgical removal" can not only prevent the further spread of "cancer cells" and protect other euro zone economies but also serve as a wake-up call to other countries and prevents the spread of the egalitarian moral hazard. To be irresolute when a prompt decision should be taken would only spell disaster. Western politicians and financers should make clear, definite decisions in a timely fashion. 

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