The Spanish and Italian debt rating cuts a few weeks ago and the failure of Franco-Belgian bank Dexia SA have only further underscored the serious economic issues that have for months been in the minds of European leaders, but until this point haven’t been seriously addressed.
Some describe the Euro-zone as a failed experiment. With discussions of the complete collapse of the economic organisation to kicking individual members out such as Greece, it is difficult to see it otherwise, but fundamentally, the Euro-zone was built on strong economic concepts. Much like the individual States in the United States have the same currency but somewhat distinct economies, the Eurozone could have worked with the right implementation. We will leave the discussion of how the Eurozone could have worked for another discussion, but what is key now is the connection on China.
Over the past week, it has been fairly clear that China is not interested in directly helping out the Eurozone economy, which is understandable. By extensively purchasing US government bonds, China has already been largely responsible for bankrolling a lot of the US expansion over the past decade and it would be loath to get itself in another similar situation with the Eurozone. Nor is it likely that China would help by lowering any existing trade barriers or change the current pace of RMB revaluation, both of which would help the Eurozone by making European goods more cost-competitive.
There are a number of reasons why this won’t happen, but most of them fundamentally revolve around the fact that China’s economic growth remains fragile. Not fragile in the respect that all of a sudden it will collapse or go into a recession, but from the perspective that it might slow from 9-10% down to 5%. In other words, China has its own domestic issues to deal with before it can deal with more global issues.
What will affect China is the likely slow economic growth that we’ll see in the Eurozone over the next few years. Nearly every European economy has been forced into making tough choices and implementing austerity measures. The net result of this is that there will be some hard pills to swallow over the next years as governments make choices that aren’t necessarily good in the short term for the citizens of their countries, but will be in the long term.
A good example is Brazil, whose former President, Luiz Inácio Lula da Silva, hired Antonio Palocci as Brazil’s finance minister when Lula first came to office. Palocci made tough decisions that were very unpopular at the time. Those decisions however have gradually brought Brazil to the economic forefront and one of the fastest growing economies of today.
It remains to be seen what happens with China’s economy. What is clear is that its fate is very closely tied to the rest of the world’s, so as the global economy slows, so will China’s.