The BRICS Bail-out the PIIGS?

There is plenty of negativity associated with the present day European project – some of it merited, some not. A key question which is not often asked is ‘what next?’ With the EU’s economic wings pretty firmly clipped for next few years, we are living through an on-going battle. While we look within ourselves and talk about future economic and political governance, what about our external position? Where is Europe’s relevance in the 21st century?

One article which PIIGSty feels represents an interesting tip of the iceberg insight to this question is in today’s Wall Street Journal entitled Emerging Giants Look at Europe Aid’

An alternative headline could be, as one clever commentator puts it ‘BRICS rescue PIIGS.’ The BRICS – Brazil, Russia, India, China and South Africa – are basically an acronym for growth especially considering the various restrictive factors on the traditionally strong US, EU and Japanese economies. The BRICS, in sum, are growing fast in economic importance. But even the BRICS are not immune to a downturn.  Chinese growth forecasts for one have been pared back thanks in part to the EZ crises. Without Europe buying BRIC exports, BRIC economies can overheat. China needs to carve out new markets and as China produces more technologically advanced exports, the best option is to sell them to Europe and North America rather than Africa where it is also trying to get a foothold.

China relies on exporting to Europe. Brazil relies on exporting commodities to China. However none of the BRICS are in economic/monetary union with each other and are prone to using tariffs to keep cheap imports flooding their domestic markets and depressing their own indigenous industry.  In other words, the BRICS are still experiencing growth pains, acting as heavily competing industrial identities rather than service driven free trade zones.

So, whats all this about China buying European bonds?

  • China has the reserves (At least €2.6 trillion) to make a huge impact on investor confidence in Europe. Contrast this with the limited (and painfully restrictive) €440bn size of the EFSF emergency bail-out fund with is due to become a formal reality by October. China publicly  buying Italian or Spanish bonds (it is alleged it has been already buying peripheral EU bonds) would almost certainly stop the slide and inject some much needed certainty into the bond markets – but this carries enormous risk and a big gamble on Europe’s ability to act collectively with a solid plan. So far, no ones betting their house on that happening.
  • No one knows where the current EZ crisis ends. Does it end with Greece defaulting/restructuring its debt as the markets have ‘priced in’ already? Will the EFSF reforms be passed in all EZ-17 parliaments? A politically fractious US with an increasingly isolated and unpopular President is unlikely to solicit any meaningful support from Congress for any emergency proposal were Europe to require it, before a new President is sworn in January 2013.
  • If the ECB only begrudgingly does it, and its politically unpopular in the Northern EU states anyway, then why would China do it? China, like the US in post-war Europe has vested interests related to their domestic economy. Exports, the counterbalancing of the US dollar with the euro and the overall health of the Atlantic economy (including the vital US where China holds large swaths of US debt and the majority of its reserves in dollars) are all vital considerations.
  • The inevitable scenario for a Chinese white knight would come with stringent iron clad strings attached. As Premier Wen Jiabao said on Wednesday “Countries must first put their houses in order….[and] take responsible fiscal and monetary policies.”

What does China want? Recognition as a market economy under WTO rules which would be a formal recognition of the evolution of the Chinese economy into the 21st century.  Sound fair?

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