Between a Crutch and Walking Stick

Wise to Support the Euro

While euro's fundamentals are much better than dollar, market panic could push the euro zone down a vicious cycle and make euro crash self-fulfilling.  The euro zone doesn't have a central fiscal authority. The small economies in the zone are vulnerable to market pressure. When market panics, it pushes interest rates sky high and makes the borrower bankrupt. If some buyer is willing to step in to replace the market, it gives the borrower time to restructure. The result could be a happy situation for both borrowers and lenders.

The IMF exists for that purpose. But, it is clearly not big enough for the euro zone's problem. China and Japan have US$ 4 trillion foreign exchange reserves and are much more powerful than the IMF in steadying the market's nerves. Of course, if a country isn't viable, it shouldn't be supported. Debt restructuring – a form of bankruptcy should be pursued. I suspect that Greece falls into this category. Ireland may need some restructuring too

Spain is undoubtedly the key battle. It is large, suffering from 20 percent unemployment rate, and, if given time, capable of paying off its debts. As long as enough resources are marshaled to maintain liquidity for Spain's debt market, the euro is quite safe. China and Japan can play a decisive role in the area. China is already providing direct support. Japan should too.

Supporting the euro is in China and Japan's best interest. They hold more dollar assets than anyone else and have a strong vested interest to safeguard the dollar's value. The only viable alternative to the dollar is the euro. If it is discredited, the Fed will be emboldened to print more money.

Down the road, China and Japan should work with OPEC countries to prepare for the post-dollar world. The three hold most dollar assets in the world. If they don't prepare an alternative, they are always at the Fed's mercy. When the Fed stimulates the economy by printing money, it dilutes their wealth. If they prepare a credible alternative, the Fed will have to think twice before it starts the printing press.

The key step for replacing the dollar is for oil to be priced in a different currency. For now, the euro is the only possibility. China, Japan, and the OPEC should begin discussions on trading oil in euros. Oil is mostly traded in London and New York now. Euro-denominated trading systems could be created in Dubai, Shanghai and Tokyo.

It's time to prepare for the post-dollar world.

Andy Xie is a board member of Rosetta Stone Advisors Limited