Saturday, October 29, 2011

Euro Summit: Chinese Help and Italian Trouble

The Economist just published this post on the element of this week's eurozone summit that would involve Chinese cash as a part of the currency zone's recapitalization plan. Ever instructive, the article lays out the China factor in some of the magazine's trademark economics-in-layman's-terms. I didn't know, for example, that the EU is China's biggest trading partner. Given all the hub-bub stateside, wouldn't most Americans assume that position was enjoyed (or maligned) by the United States? 

Yet the piece's author makes an effort to signal that the appeal for Chinese cash is neither revolutionary nor a particularly important change in the status quo. He takes a longer-term view on the EU-Chinese relationship, which of course bears direct influence on the American role between the two. 

"Grand political bargains between China and Europe—money in return for more representation at the IMF, or market-economy status—seem wildly improbable. These prizes will eventually come anyway; and weak though parts of Europe are, the EU cannot be seen to trade them too nakedly. Bargaining of this sort would also require both parties to change their positions markedly. China is keen not to be seen as a source of “dumb money”, but requiring big political concessions in return for cash is a pretty clear signal that this is not a commercially attractive investment. As for the euro zone, it can hardly claim that senior Spanish and Italian debt is now safe for institutional investors if it has to horse-trade too hard to get China on board."

And further along the pessimism spectrum is the Wall Street Journal, which, true to form, has expressed typical euro-skepticism on the summit's results and bemoaned the plan's lack of detail and the risks that remain for U.S. companies and stakeholders. Though the European Financial Stability Facility will "backstop" troubled eurozone countries against default, the paper says, this week's decisions fall short of the muscular moves called for by experts and do relatively little to stem fears of a backslide toward recession in Europe and worldwide. 

Both articles signal the lingering dangers of the tenuous Italian situation, where fractious politics in Silvio Berlusconi's government has dimmed hopes for any kind of meaningful action against the euro's woes. Italy is heavily in debt and, as the third-largest economy on the euro, its future determines that of a host of other dependent nations both in and outside the monetary bloc.

Courtesy of the Wall Street Journal and ICAP

Though the chart refers to Italy only, its title -- "Brief Relief" -- sounds just as appropriate for the whole of the eurozone for the many observers that continue to be concerned about the currency's immediate and middle-term prospects.


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