Implications for Europe

The debt crises of Greece and other EU nations reveal several problems in the EU's institutional development.

The first problem is how to make monetary policies correspond with other policies. Monetary policies of EU member states have become highly interconnected. At the same time, other policies—such as fiscal policies, credit policies, wage policies and social development policies—remain up to the member states themselves to formulate and implement.

This can easily lead to a disconnect between monetary policies and other policies. To avoid the Greek debt crisis from re-occurring, the EU should treat this problem seriously.

Another major problem is how to ensure member states implement relevant EU regulations. To maintain economic stability, the EU's Stability and Growth Pact has set the upper limits of the proportions of a country's fiscal deficit and public debt in its GDP at 3 percent and 60 percent, respectively. However, the EU has no means to ensure that its member states abide by these regulations. Nor has it formulated any punitive measures.

In addition, how to make sure member states provide authentic data remains a headache. The European Central Bank enjoys a high degree of independence, which provides an institutional guarantee for the functioning of the European economic and monetary union. But high independence also makes it difficult for the bank to deal with the member states' falsification in statistics. Therefore, the European Central Bank and Eurostat are expected to take effective measures to eliminate accounting frauds in EU member states.

The final question is whether it is necessary for the EU to create its own credit rating system. International credit rating agencies—such as Moody's, Standard & Poor's and Fitch—fueled the escalation of the Greek debt crisis. In December 2009, they reduced the credit rating of Greece's government bonds, leading to unprecedented turbulence in the country's stock and foreign exchange markets. This has forced the Greek Government to issue bonds at higher costs. Before that, Greece's debt problem was far from that serious.

Based on regulations of the European Central Bank, should the credit rating of any member state be downgraded by Moody's—or any other international credit rating agency, for that matter—government bonds cannot be maintained as collateral with which to obtain loans from the European Central Bank.

Consequently, many European scholars hold that, as a giant in the world economic arena, the EU should establish its own credit rating system. It should not, they say, be controlled by the conclusions of Moody's, Standard & Poor's and Fitch.

The Greek debt crisis could be the biggest challenge for the euro zone since the birth of the euro in 1999. As the future of the crisis remains uncertain, many fear the euro zone may be unable to recover from this setback—and may even disintegrate.

This prediction is unduly pessimistic. Whether a currency can become an international tender depends on the strength of the economic entity issuing the currency.

The economic power of the euro zone, which consists of 16 European nations, is recognized worldwide. And the economic aggregate of Greece accounts for only about 3 percent of the euro zone. Thus, the crisis has not held back the economic strength of the euro zone.

What's more, since the birth of the euro, European countries have largely, and significantly, benefited from it. It is unlikely at best that they will ever give up the euro and revert to long-abandoned currencies such as marks, francs and drachmae.

This article was first published at Beijing Review on March 22, 2010.