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Economy

Could huge safety net be strong enough to protect euro?

By Wu Liming (Xinhua)
Updated: 2010-05-11 14:50

The US Federal Reserve reopened a program to ship billions of US dollars overseas in a bid to pump more short-term cash into the financial system and make sure banks have the dollars they need.

Other central banks, including the Bank of Canada, the Bank of England, the Swiss National Bank, and the Bank of Japan also are involved in the temporary dollar swap plan.

Certainly, the above-mentioned measures and actions have propped up the market confidence.

In Asian markets on Monday morning, the euro climbed to 1,2963 US dollars, up from the 14-month low of 1,2523 US dollars late last week.

Analysts also noted that the EU's 500-billion-euro package is merely equivalent to about 6 percent of the euro zone's gross domestic product, and it would spread over several years, so it is not beyond the zone's economic capacity and it is workable.

However, on the other side of the coin is that the safety net has its own shortcomings.

For one thing, the huge package takes several years to implement, domestic political changes in the EU states could be uncertain elements.

For instance, due to domestic pressure, some EU member states might become reluctant to support the indebted euro zone states, especially if those states proved unwilling or unable to meet tough austerity conditions attached to bailout loans.

In Germany, Chancellor Angela Merkel's center-right coalition lost an election in the important state of North Rhine-Westphalia on Sunday, depriving Merkel of a majority in parliament's upper house. Local media believed that one reason for the loss appeared to be public anger at the idea of aiding Greece.

For another, any bailout package is a temporary measure for the states in trouble, meaning the safety net would not solve their fundamental problems. The current safety net is, by no means, an exception.

What those countries have to do is to cut their spending, to reform their economic structure and to realize a sustained and healthy economic development.

Only by doing so, could the indebted states like Greece struggle out of the economic difficulty, and the euro zone march toward the track of stability and prosperity.