BEIJING, May 10 -- The European Union (EU) and the International Monetary Fund (IMF) on Monday pledged a bailout package worth nearly 1 trillion U.S. dollars to defend the embattled euro.
On the same day, the European Central Bank (ECB) took an unprecedented step to announce that it would buy government and private debts in the euro zone.
Obviously, the two decisions were aimed at building a huge safety net to shield the euro zone's weakest nations like Greece from relentless attacks.
The question is: could the safety net be strong enough to keep the euro, the second global reserve currency next to U.S. dollar, in safety?
The huge package, consisting of emergency measures worth 500 billion euros (670 billion U.S. dollars) and 250 billion euros (335 billion U.S. dollars) from the IMF, surprised the world in terms of size and scale, showing the firm and resolute determination of the EU and the IMF to win the battle.
European economists have estimated that if Portugal, Ireland and Spain, or the so-called PIGS states, eventually required similar three-year bailouts to that received by Greece, the total cost could be 500 billion euros.
That is to say, the package vowed by the EU itself is capable of covering it.
What's more, the ECB's "U-turn" in giving the green light to buying government and private debts in the euro zone, has added the strength and potential of the safety net.
This implies pushing the "nuclear button" as some analysts called, who believed such unprecedented step would be vital to calm the markets.
Previously, the ECB, whose operation is independent from the EU headquarters, has been extremely reluctant to take that step.
European laws prevent the ECB from buying debt directly from governments. However, it can bypass this restriction by buying debt second-hand from banks.
The size of the package and the ECB's decision reflected the growing sense of urgency in the EU as well as around the world that a sovereign debt crisis could rapidly sweep global markets.
The overall package was thus described as a series of "far-reaching steps" by IMF managing director Dominique Strauss-Kahn.
"The fiscal efforts of the EU member states, the financial assistance by the (European) Commission and by the member states (and) actions taken today by the ECB proves we shall defend the euro whatever it takes," EU Economic and Monetary Affairs Commissioner Olli Rehn said.
The Greek debt crisis has evolved into the most severe crisis the euro zone has ever encountered since the single currency was created in 1999. Moreover, the crisis might spread to other weak eurozone states like PIGS countries, or even could endanger the global economy at large.
Because of this, leaders from the 16 euro zone states reached consensus on Saturday in Brussels, vowing to "take every means" to safeguard the stability of the euro.
The 27-nation EU boasts a powerful economy equivalent to that of the United States. The euro has played a vital role in the global economy.
As the euro has become the world's second reserve currency next to the U.S. dollar, preserving a stable euro benefits the global economy.
Right after the announcement of the huge package, the G20 immediately announced their support, and central banks around the world joined the coordinated effort.
The U.S. Federal Reserve reopened a program to ship billions of U.S. 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 U.S. dollars, up from the 14-month low of 1.2523 U.S. 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. |
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