July 13, 2012, by China Policy Institute
Will the rest of the world bail out the Eurozone?
The euro zone crisis rumbles on. Just when European policymakers reach a semblance of consensus, further twists emerge, rendering each action one step behind the rapidly unfolding events.
At a recent meeting of the Integrating Global Society Priority Group at the University of Nottingham, several academics warned that European policymakers are unlikely to resolve the crisis without the assistance of non- European states. What role then, if any, will the major powers outside of Europe be prepared to play?
For all the talk of globalisation and integration, awareness of the global reach of a full-blown euro crisis is not sufficient to galvanise a global effort to pre-empt it. The political barriers to American or Chinese intervention are high and few other countries have the capacity to make a significant contribution.
China has become a disenchanted supporter of the European Union. Its criticism of the EU focuses on the region’s perceived pursuit of policies designed to secure short-term gain at the expense of long-term security. It does not accept that developing countries should subsidise wealthy Europeans for their extravagant and irresponsible lifestyles. China sees the EU’s commitment to unsustainable entitlement programmes, namely generous pension schemes and unemployment benefits, as prime examples of this, blaming them for the erosion of the region’s economic efficiency and competitiveness. And the Chinese government is yet to be truly persuaded that common global interests are sufficient for China to risk its hard-earned reserves to bail out the euro zone.
Academics at the priority group’s meeting agreed that China has a considerable stake in the resolution of the current crisis – the European Union is its biggest trading partner – but political realities present considerable obstacles to Chinese action.
There is a sense that China lacks political incentives to act. Without the existence of a single European authority, any financial intervention would fail to meet with the political recognition China craves. If China is to invest in distressed European assets, it must receive something in return that can be cashed in at a later date, which is in alignment with its long-term strategic objectives. This approach was on display at the recent G20 summit in Mexico where China offered US$43 billion to the International Monetary Fund’s crisis-fighting reserves. Here, China allied itself with the emerging world as part of a wider bid to secure greater voting rights within the IMF, further evidence that when China offers financial assistance, it expects its pound of flesh.
Political considerations aside, China faces considerable economic challenges of its own. Recent economic data points to growth declining towards 7 per cent and Premier Wen Jiabao has spoken of the large “downward pressure” on the national economy. The ability of China to deploy reserves to stabilise the European economy is limited. Savings generated by large trade surpluses have already been invested and are held in a form that cannot be realised for swift deployment. Perhaps the biggest role China can play in resolving Europe’s economic woes is to address trade imbalances through monetary policy, rather than through the provision of direct financial assistance.
At the roundtable at Nottingham University, consideration was given to the role that Brazil, as representative for a number of developing countries, might play in any co-ordinated action. The overwhelming conclusion was that Brazilian support would be limited. Its funding capacity is small, economic growth has slowed to 4 per cent and intermediation costs in Brazil are high, making the country an unlikely source of cheap credit. Moreover, Brazil’s aims when setting aside funding for international financial stability are, similar to China, primarily political. Funds are channelled entirely through the IMF as part of its efforts to secure greater voting rights.
So what of the world’s only superpower? Again, any role the United States might play will come with a high degree of conditionality. The dynamic between the US and the euro zone is on a parallel with the relationship between Germany and Greece: no money can be expected by the latter without agreement on conditions set by the former. A significant political intervention by the United States is unforeseeable in the short term. It will only come about should the euro crisis generate a degree of contagion that imperils the US financial system and, at present, US officials believe the EU has sufficient policy tools at its disposal. The US is also in the midst of an election cycle, weakening the likelihood of financial support for European governments or institutions.
And while the effect of an acute financial crisis in the EU could affect Wall Street, it would have a more limited effect on the US “real economy”. The EU as a whole is America’s largest trading partner, but this statistic misrepresents the nature of US economic links. Individually, America’s major trading partners are Canada, China, Mexico and Japan, with Germany fifth. This dynamic reduces the likelihood of the US judging that the economic benefits of providing funds to the EU outweigh the negative political consequences of authorising such a move.
US action, or lack of it, is intertwined with that of China. If China proves resistant to providing financial assistance, the US will argue that the responsibility should not fall on its shoulders alone. There is also concern in Washington that if the US offers its public support for a particular course of action, it could make EU member states less willing to adopt a plan deemed to have been “made in America”, and, in turn, China would be less willing to support it.
Global economic interdependency may be at its height but, if Europe is to pull through this crisis it has little option but to find the strength within.
This article originally appeared in the South China Morning Post on 12th July, it is also available in Integrating Global Society blog.
Steve Tsang is Professor of Contemporary Chinese Studies and Director of the China Policy Institute at the University of Nottingham.
Opinions expressed in the CPI blog do not represent the views of the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham. They are the personal views of the bloggers/authors.