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Eurozone Crisis: China doesn't want to be Germany

World Leaders Gather In Cannes For The G20 Summit

Dan Kitwood/Getty Images

CANNES, FRANCE - NOVEMBER 03: US President Barack Obama is welcomed by the French President Nicolas Sarkozy to the G20 Summit on November 3, 2011 in Cannes, France. World's top economic leaders are attending the G20 summit in Cannes on November 3rd and 4th, and are expected to debate current issues surrounding the global financial system in the hope of fending off a global recession and finding an answer to the Eurozone crisis. (Photo by Dan Kitwood/Getty Images)

Aren't you glad we don't have Greece to worry about anymore? After two years of crisis, the Greek economy is in full meltdown mode and the country's political system is falling apart. It has no hope of paying back its debt. The only question now is whether it will remain the Euro currency union, or whether default and bankruptcy will mean a return to drachma. 

We now turn our attention to Italy, number three in economic size, behind German and France. There's enough money sloshing around the euro currency union to deal with Greece and similar small economies, but if Italy can't refinance its 1.9 trillion euros of debt, a bailout isn't currently a realistic option. 

Unless maybe the Chinese pitch in. China has more than $3 trillion in foreign currency reserves, which it could pump into Europe. The question is what this would ultimately cost Europe, in terms of various trade-offs (pun intended), not to mention what it would cost China itself. This is Yu Yongding, former member of China’s central bank monetary policy committee, writing recently in the Financial Times:

[A] strong Europe is always welcomed by Beijing for geopolitical reasons. As China’s most important trade partner, a financially sound and prosperous Europe is firmly in China’s interests. Sitting as it is on $3,200bn in foreign exchange reserves, China can help, but while it is willing to do so this will not be without conditions.

China's simply isn't sure it wants to play the role of Germany, the country that should naturally be expected to bail out any Eurozone country that's considered too big to fail. It been pretty obvious since the beginning of the Greek debt drama that German doesn't want to be the Euro lender of last resort. This is a complete political and economic failure. but there you have it.

So China is rightfully skittish about bailing out a Europe that may not be able to repay said bailout for a generation. The only reason for China to do it is to anger the U.S., which due to its own deeply indebted position really isn't capable of creating a new Marshall Plan to rescue Europe for decades of fiscal mismanagement.

Although you could also argue that China should do it to ascend to its rightful place in the world economic order. Except that might be a responsibility that China doesn't want, given that despite its apparent clout, it could actually be the next victim of the global financial crisis. At the Guardian, Larry Elliot sums it all up perfectly:

...China's economy is more fragile than its near double-digit growth rate would suggest. Back in 2008, when the crisis broke, industrial production collapsed around the world.

Chinese factories were mothballed and the workers laid off. China's communist leaders well understood the potential for serious social unrest so they ordered Chinese banks to keep the economy moving by expanding credit. At one stage, the annualised increase in credit growth in China hit 170%, almost certainly the biggest such surge there has ever been.

The result was over-investment on a colossal scale: not just in industrial capacity but in property. China is now awash with factories that will struggle to make a profit and with a glut of overpriced housing. Historically, an uncontrollable rise in credit has been the single best indicator of a financial crisis, as the west knows from its own recent experience.

Everyone is effectively experiencing death by credit at this juncture: the U.S. was first, with its pain localized to the housing and finance sectors; Europe followed, with a sovereign-debt disaster caused by an awkward currency union; China is up next, experiencing the blowback from propping up its own still-maturing economy as a means to prevent social collapse.

I don't know about you, but at the moment, the U.S. looks to be in better shape than anyone else, simply because it's so much farther along in dealing with the Great Recession. A solution to the crisis does present itself: America provides the leadership, China provides the money, and Europe...well, Europe unfortunately may have to accept that it value as a market doesn't extend to real power on a geopolitical scale.

Follow Matthew DeBord and the DeBord Report on Twitter.

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