Bailout From China Should Be The Last Thing Europe Wants30 October, 2011, 4:57. Posted by Zarathustra
Tags: Economy, Euro Crisis, Europe
I am seriously not sure why people think that China bailing out Eurozone could actually be a good thing.
No, it isn’t. In fact, it is a very bad thing.
The fact that China has a large foreign exchange reserve is because of its trade and exchange rate policy, which allows China to run trade surplus year after year, together with capital inflow, they force its central bank to create Chinese Yuan currencies to purchase foreign assets in order prevent Chinese Yuan from appreciating too rapidly, thus accumulating large foreign exchange reserve. This is one of the aspects of global imbalances that people have been talking about once in awhile, and something that once in awhile people talk about how to get rid of it. Chinese foreign exchange reserve should not have been that large, and the accumulation of foreign exchange reserve by the Chinese has basically been a massive quantitative easing programme from the perspective of Chinese domestic economy, which fuels its own investment-driven economy.
But now, amazingly, when it comes to rescuing the Eurozone, people seems to forget that perhaps this was actually part of the reason why the world economy has got down to this. In the context of dealing with global imbalances, people would suggest that China should not be having large foreign exchange reserve. In the context of saving Europe, however, people now are suggesting that China should use its large foreign exchange reserve to do Europe a favour. That’s just not right.
Let’s be clear about that: Europe, on the whole, is a much richer place than China, and Europe should have the means to solve the problem, like printing money by the European Central Bank, but they are not using it because of German’s obsession of hard money. The fact that this is a monetary union of 17 countries makes decision making difficult, which complicates the problem. But on the whole, Europe should not be asking others for capital. In fact, asking for outside capital to rescue the Eurozone should be the last thing Europe wants.
The reason is that Europe, except Germany and Ireland, have been running trade deficit which China. The essential thing for peripheral countries would be to regain competitiveness and to hopefully run trade surpluses which help their economic growth. Asking China for money into Europe essentially means that Europe is asking China to lend to Europe in order to buy Chinese exports, and this should absolutely be the last thing Europe wants, especially for the peripheral countries. As I wrote before, and I shall repeat it once more, that if China ever decides to invest in EFSF or whatever in large quantity, they are not saving Europe, but saving themselves by helping their own exports.
This is absolutely not a win-win situation, and Europe should not be asking for China. Europe will lose. China will probably lose too at the end. Thus I strongly disagree with some of the people who think that it is good for China to save the Euro (like this and this).
Perhaps this kind of news can provide some boost to the stock market, but it is not getting to the core of the problem at all. Unfortunately, European leaders seem to have no idea that they are embracing ideas which will absolutely harm them in the future.