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Euro crash would help China’s currency

world Updated: Sep 14, 2011 02:08 IST
Alan Wheatley
Alan Wheatley
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Greece’s exit from the euro zone would inflict untold damage on Europe’s economy, further burnish the attractiveness of a rising Asia and hasten the emergence of China’s yuan as a global currency. Until recently, even thinking about the consequences of a break-up of the euro was, well, unthinkable. No longer.

Doubts over how much more austerity recession-hit Greece can endure are growing by the day. They are matched by doubts as to how long political and public opinion in Germany, the euro zone’s paymaster, will stand for keeping Athens and others on the bloc’s periphery afloat with emergency loans and bond purchases by the European Central Bank.

Some within the ECB are equally unhappy about it.

If the outcome of the mounting crisis is unpredictable, so are the consequences.

Domenico Lombardi with the Brookings Institution, a Washington think tank, said the economies of the euro zone are so inter-connected that the secession of one of the 17 members would open up a Pandora’s box.

Greece could not quit or be expelled from the bloc in a surgical manner. Markets would then line up Italy in their sights. If Rome were then forced out, France’s banks — already under pressure from short-term funding strains — could melt down because of their exposure to Italian debt.

“It would be almost impossible to draw the line. You could devise a framework for an orderly exit in normal circumstances, but we have gone much too far for that,” said Lombardi, a former executive director of the International Monetary Fund. He put the chances of a euro zone break-up at fifty-fifty.

In a sign of the dangers that the crisis poses for the already weak US economy, treasury secretary Timothy Geithner heads to Europe on Friday for the second time in a week for an unprecedented meeting with euro zone finance ministers.

One starting point in trying to assess the economic fall-out is the September 2008 bankruptcy of investment bank Lehman Brothers, which dragged the global financial system to the precipice and tipped much of the world into recession.

The rush to safe-haven assets and to square positions after a break-up of European Monetary Union would be akin to the aftermath of Lehman’s default, according to Seamus Mac Gorain with J.P. Morgan Securities in London.

Fragmentation of the euro would also open the door for China to accelerate the international use of the yuan.

About 7% of Chinese trade is now conducted in yuan, also known as the renminbi, and that share would be sure to jump if the euro broke up.