Stephen King: Will sending around the begging bowl really solve the eurozone crisis?
Economic Outlook: The Chinese should be able to provide more than loose change to help the eurozone
Monday 31 October 2011
So now we know. The solution to the eurozone crisis lies in passing around the begging bowl. Investors may have reacted with euphoria to the announcement that the eurozone bailout fund would rise from €440bn (£386bn) to well over €1 trillion, even after yet another Greek bailout. But policymakers still have to explain precisely where the money will come from and how it will be spent.
One option for spending the money lies with the creation of an insurance fund designed to guarantee perhaps the first 20 per cent of losses on government debt issued in coming years. The idea is to persuade investors that buying sovereign bonds issued by the likes of Italy and Spain is relatively risk-free. If enough investors believe the scheme might just work, yields on Italian and Spanish government debt should fall, leading to lower borrowing costs and, in turn, a much-needed boost to economic growth.
Yet the devil is in the detail. Over what period of time should the new bonds be issued? The cost of protecting bonds with five-year maturities, for example, would be a lot lower than the cost of protecting bonds with a 50-year lifespan. Which countries should be entitled to protection? Presumably only those with coherent medium-term fiscal plans should be helped. Who, though, decides on the degree of coherency? What about the massive stock of existing bonds that would presumably have no protection? Might investors shy away from these, leaving yields still excessively high? That, sadly, has been the case so far, with interest rates on the latest slug of new Italian debt rising above 6 per cent.
It's increasingly clear, though, that the solution rests not only on the ingenuity of any technical plan but also on the eurozone's ability to connect with those bestowed with deep pockets, most obviously the Chinese. Which is why Klaus Regling, head of the European Financial Stability Facility (in effect, the eurozone's bailout fund), went to Beijing even before the ink had dried on the agreements reached last week. The Chinese aren't short of a bob. If they feel sufficiently generous, they should be able to provide more than just loose change to help the eurozone out of its crisis.
The oddity about all this is that it's not only the Chinese who have large amounts of spare cash. The Germans do too. Both countries have run persistently large balance of payments current account surpluses in recent years. In effect, their domestic savings are higher than their domestic investment. The surplus savings have to find a home somewhere. China has mostly invested in the US. Germany has also placed its faith in Uncle Sam. But unlike China, Germany has also poured a huge amount of money into southern Europe.
The begging bowl has come out now because Germany no longer has an appetite to invest heavily in Italy, Spain or Greece. That's hardly surprising. With a massive haircut on Greek government debt part of last week's deal, Germany has lost any vestige of enthusiasm for offering support to southern neighbours. The way Germany sees it, good taxpayers' money has chased bad bank loans down the Athens plughole. What is the point of lending Greece more when the money provided so far has led to a huge haircut and scant evidence that Athens can deliver anything but empty promises?
So the northern European creditors seem to have come up with a wheeze. Persuade the Chinese that Europe is committed to the eurozone's survival; stress that Silvio Berlusconi means what he says about Italian budget deficit reduction; emphasise to Beijing that Greece's problems are in the past; urge the Middle Kingdom to take the European bank recapitalisation plan seriously and tell Chinese policy-makers that buying paper issued by European governments is safe.
In other words, northern Europeans plan to persuade China to believe things that northern Europeans themselves no longer believe. Klaus Regling has become the chief proselytiser for a group of eurozone atheists who nevertheless want others to find the faith. Perhaps, for Mr Regling, television evangelism beckons.
The Chinese must find all this very funny. For many years, they have been portrayed as the bad guys, deliberately keeping their exchange rate undervalued, living off their super-competitive exports, consuming insufficient Western goods and stealing Western jobs and technology. Now, it seems, they are the saviours of the Western financial system. In a rather unlikely guise, capitalism's Messiah has now arrived. Behold: it's the Chinese Communist Party!
The Chinese, however, have no intention of repeating the mistakes made by the Japanese in the late-1980s and early-1990s. Flush with cash from their domestic financial bubble, Japanese investors acquired US trophy assets – the Rockefeller Center, Pebble Beach – only to go bust shortly after. Admittedly, European government bonds lack the allure of major pieces of New York real estate or Californian golf courses, but the point still holds. The Chinese will tread very carefully.
And, should Beijing decide to be generous with its spare cash, it will doubtless want something in return. Unlike Europe, with its focus on health hazards linked with tobacco, there are plenty of smoke-filled rooms in Beijing within which the Chinese will able to inform Mr Regling and those who follow in his footsteps of their demands.
So what might be uppermost on China's wish list?
Most obviously, Beijing wants allies in its increasingly fractious stand-off with the US regarding the renminbi/dollar exchange rate. But it wants more than this – better access to Europe for its exporters and greater freedom to take large or even controlling stakes in European firms; improved access to Europe's high-tech industries and a bigger seat at the international policy table. Through being kind to Europe, Beijing hopes that Europe will be increasingly kind to China.
There is an oddity in all of this. Within the eurozone, it's increasingly clear that Germany, the eurozone's major creditor, has most of the power. When it comes to bailouts, the Germans are flush with cash and, as a result, can dictate terms. Yet, as the eurozone passes around the begging bowl, the Germans may find themselves joined by the Chinese. If Europe's debtors resent being told how to behave by Berlin, how will they react when Beijing also gets involved? Will Chinese creditors, like German creditors, insist that southern European nations deliver austerity? And how will the democratically-elected governments of those nations react?
Mr Regling may have his heart in the right place. But as he tours Beijing's smoke-filled rooms, showing his wares to potential customers, he is effectively selling the family silver.
European nations can choose to live beyond their means for a while but, in a fast-changing world, there will be a political price to pay. We'll only know how much when the smoke eventually clears.
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