Why Euro Will Not Collapse

The ongoing sovereign crisis in the eurozone countries has renewed concerns over the fate of the euro, the second largest reserve currency as well as the second most traded currency in the world.

Jean-Claude Juncker, head of eurozone finance ministers, on Saturday cautioned that the ongoing debt crisis of Greece and other countries in the region could hit Italy and Belgium, Suddeutsche Zeitung, a German daily reported.

Noting that the crisis could have disastrous effect on the currency of the region, euro, he warned we are playing with fire.

Greece, which is currently seeking a second bailout, faced a downgrade in its credit rating by Standard & Poor’s last week. Moody's also slashed Greece's rating by four notches, citing macroeconomic and implementation risks in the country’s austerity measures.

The single currency came under pressure in the recent trading sessions amid renewed worries over the continued debt crisis in the peripheral nations in the eurozone. EUR/USD extended its decline to around 1.4100 levels last week, from a year-high of close to 1.5000 in April.

Continued bad news in the region again raised concerns over the collapse of the euro, though doubts have been in place since the currency was introduced more than a decade ago.

However, dropping official currency of 17 nations in Europe would be a political disaster for the region, says a Chinese news website.

The emergence of the euro was a result of the integration process in Europe and the collapse of currency would greatly undermine European integration, China.org said.

So it is hard to imagine that European leaders would dare to let the euro die, it said.

Discarding the euro would mean a huge economic cost for the member countries in the eurozone, as the common currency has been helpful in cutting down transaction costs, reduction in long-term interest rates, maintaining price stability, and many other advantages.

Also, current debt crisis in the peripheral nations is the most serious test for the euro, but will not dismantle the foundation of the currency. The size of economies of debt-hit countries such as Greece, Ireland and Portugal is quite limited, the report said.

So, as long as the major economies such as Germany and France remain strong, the euro will be able to weather the storm.