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With Italian bond yields rocketing and the euro wobbling again, European policymakers seem to be praying for a white knight to come riding to the rescue.
Or maybe a red one. Namely China.
Set aside the irony of an enormously rich capitalist region looking to a still nominally communist and still very poor, on a per capita basis, country to bail it out of problems of its own making. But it doesn’t make much economic sense either.
That’s down to a simple identity in international accounts. For China to be buying European bonds, be they EFSF issues or Italian sovereign paper, would mean the Chinese were exporting capital to Europe. Which is to say, Europeans are seeking to run a capital-account surplus with the Chinese. But the flip side of a capital-account surplus is a current-account deficit. In other words, in seeking Chinese funds to prop up European bonds, Europeans are saying they’re willing to run a trade deficit with China.
That’s unfortunate, because, with the euro-zone economy looking like it’s sliding into another recession, the prospect of a current-account deficit with China means domestic European industry will be sacrificed in return for Chinese goods. What the euro zone needs, and especially the countries at its periphery need, is more growth, and the best way to growth is exports. What Europe needs to do is run a capital-account deficit with the rest of the world, not to import capital from elsewhere.
This is a point Michael Pettis, a finance professor at Peking University, has been hammering away at in his respected weekly newsletter, China Financial Markets. Europe can’t look to Chinese capital to be rescued from its problems.
As it stands, the euro zone has a moderate trade surplus with the rest of the world. It is in a favorable position without prompting wider imbalances.
Rather, the problem is the imbalances within the euro zone: massive current-account deficits across the periphery and a huge surplus in Germany. Germany is trying to force these to be rectified through austerity and deflation inside the deficit countries. In theory, this could work. Politically. It's well nigh impossible. And money from China wouldn’t make it any easier.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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