CHINA OR GERMANY?

GERMANY MUST DO IT, NOT CHINA

Michael Pettis

Global Economic Intersection, November 13, 2011

I have already discussed last month why I think the desperate attempts by Europe to get China and other Asian and BRIC countries to bail out the weak sovereign borrowers is absurd, but the topic has become so important in the past two weeks, at least judging by the number of calls I have received from journalists, that I thought I would reproduce a discussion I recently had in a forum among a number of China specialists (the forum is Rick Baum’s estimable ChinaPol).

We were discussing an article that recently appeared in the New York Times calling for a Chinese bailout of Europe.  According to the author, Arvind Subramanian, at the Peterson Institute, “Europe is drowning and needs a lifeline.”  That lifeline is effectively a bail-out package from China.

Bad politics

Although I agree with Subramanian that China should use current events to play a bigger and more decisive role in global finance, and I certainly agree that as a surplus nation it is very much in China’s interest provide financing to the eurozone, I am not sure it makes sense for China to do anything that actually helps Europe.

In fact I found the article a little bizarre, but not at all out of step with the thinking in Europe. I think the request for assistance from China and other developing countries shows how confused Europe’s leaders are and reinforces the claim made by Beth Simmons in her book (Who Adjusts) on the politics of the 1930s European debt crisis. Simmons argues that one of the problems with a debt crisis is that when debt levels are perceived as being too high, major stakeholders are forced into behaving in ways that reinforce credit deterioration and exacerbate the debt problem.

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