China to the rescue?

When I get bored while standing in line at the store, I like to pull up the Europe headlines on my BBC app.  This particular headline caught my attention:  China ‘considering’ eurozone rescue pledge, Wen says.  Interesting announcement, I thought.

Now, I’m about to sound like a cynic…

Europe, don’t bank on it.

I’m by no means a Chinese economy expert (never claimed to be, and never will!), so I’ll turn to some pretty smart people to help back up this claim.  A lot has been written recently about the slowing of the Chinese economy, such as Paul Krugman’s New York Times article Will China Break?.  Krugman picks up on the themes that Patrick Chovanec, an economics professor at Tsinghua University, has been writing on for quite some time (see this example of his blogposts on the slowing of the Chinese economy).  In discussing what this slowing means for a possible eurozone rescue, Doug Saunders clearly lays out why China’s economic troubles will prevent any significant bailout (China won’t be riding to the rescue any time soon).  In essence, the property bubble and inflationary problems is undermining China’s trade surplus, and wealthy Chinese businessmen seem to be shifting their capital outside of China, creating the same sort of capital flight that has plagued so many European economies.  While others contend that the fears of a Chinese decline are overblown – see, for instance Steven Rattner’s Will China Stumble? Don’t Bet on It – I’m willing to bet that China’s supposed eurozone promise is more of a PR move by the Chinese government to send an image of cooperation (perhaps as they prepare to do something Europe will find unsavory about Iran and Syria?) than a real economic commitment.

Even if China does deliver on financial support, its effect will be minimal.  This is, in part, because a financially cautious Chinese leadership is unlikely to endanger their reserves investing in what at this time is seen as risky European markets (an argument made in this article from The Economist).  Finally, despite their growth in recent years, China is still a small part of the global economy (it’s still half the size of the EU economy), and they might not be powerful enough to make such a significant investment, as Damian Grammaticas argues in Why China won’t save the world.

If Europe wishes a quick and sustainable recovery from this most recent crisis, current austerity measures will not be enough, nor will any temporary bailouts from external actors.  Several of the economies need significant economic restructuring – Greece and Italy stand out as the main suspects – but this restructuring is going to require some major internal changes.  If Europe is going to find a way out of the eurozone crisis, they will to need to rescue themselves.

 

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