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  • Will China Bail Out the EU?

    The European press has a death grip on the idea that China will provide the huge sums of money necessary to make a dent in the EU financial crisis. Like most things involving the EU, the crisis has progressed at a snail’s pace. This has given the media the chance to recycle the “China is coming!” story again and again, despite the lack of evidence. In fact, the barriers to a Chinese bailout are daunting for several reasons.

    1. The Scale of the Problem

    The EU does not need €10 billion to avoid default; it does not need €50 billion; it does not even need €100 billion. It needs more like €500 billion. Nor is this a case where the PRC can send a signal with a token commitment and the market will follow. The scale of the EU’s needs simply outmatch the current capacity and willingness of nearly all creditors.

    2. The Financial Appeal

    To be attractive, an investment must have a decent expected yield. This requires the invested project to succeed in some fashion. But even if the PRC provides enough money to make an EU-wide bailout truly effective, what then? Is the EU going to grow such that it can support a nice return on an investment of this size?

    The EU’s solvency problem is just the first step. For investing in the EU to have any financial appeal, the second step of kindling growth must also be credible. And the EU hasn’t even begun to tackle that one.

    3. Trans-Atlantic Political Problems

    It has been coyly suggested that Europe can offer China non-financial benefits. Market economy status could be granted earlier than the original date of 2016, or the EU could otherwise alter its treatment of Chinese policies ranging from currency to human rights. These changes would have comparatively little value to Beijing, especially since the world would hardly consider them a true endorsement of Chinese behavior.

    More valuable to Beijing: the EU could lift sanctions placed against China after the Tiananmen Square massacre. Or it could make available high technology that has potential military use—say, by selling stakes in aviation firms. This, however, would cause serious problems in EU–U.S. relations and possibly Europe itself. America will worry that European technology will, among other things, make the PRC’s threat to Taiwan sharper, while many Europeans may worry that the EU is selling its soul. They should certainly worry that the EU will have given up even the pretense of global leadership.

    4. Political Problems in China

    This factor is being missed in Europe. China is far poorer than any EU member. The Communist Party is already under constant criticism for placing so much money in low-yield American treasury bonds. It cannot easily toss hundreds of billions at richer countries that have lived beyond their means while ordinary Chinese face high urban housing prices, high rural unemployment, and increasing concentration of wealth.

    Capping it all off, the PRC is in political transition, as the autumn 2012 Communist Party Congress will choose new leadership. Chinese officials make careers out of not standing out and certainly not opening themselves to populist criticism. With their futures on the line in less than a year, who in China’s leadership is going to speak out for large-scale participation in an EU bailout?

    If Europe is in fact willing to sell a good chunk of its soul, China might be sufficiently interested to take on a risk of this size. Otherwise, Brussels should not hold its breath.

    Posted in International [slideshow_deploy]

    4 Responses to Will China Bail Out the EU?

    1. Guest says:

      China can go either with base hits, the intermediary steps (i.e. market economy status, weapon unfreeze, no barrier hi-tech sales…etc), or 'home run'.

      The "home run" being: loan the money to EU (say, $1T worth) in RMB, not Euro nor dollar. Now, it gets interesting. Does EU take the money and spend it as is (i.e. as the new 'reserve' currency), or turn it down? If the former, and by keeping RMB non-tradable or largely restricted, China basically just achieved a world-wide financial revolution.

    2. Death of Europe says:

      Why don't we just wash/wipe a monetary system? They would be no such thing as debt. Whoever truly controls the world wants it "in debt" so it can claim that it the world owes these people. The Central Bank/Federal Reserves need to be removed from these lands in order for us to truly be free.

    3. Bobbie says:

      I agree with Death. no pun please!

      the government leaderships of the world caused these debts. They can take the cuts from their RICHES OF GREED! Look at the money Quadafi is holding! Time to hold government rulers accountable especially here in America and take the GREED OUT OF WORLD GOVERNMENTS!!

      Reduce public servants and give all who's left, minimum wage so people being served can be sure the service is sincere! Or be wise enough not to take government handouts in the first place.

    4. Nalliah Thayabharan says:

      The USA wants to trigger a WWIII using Iran that would greatly undermine the economies of China and Russia and the same time the US and the EU want China and Russia to use their economies to prop up the economies of the US & the EU .

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