Commentary
Michael Pettis
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Source: Getty
Other
Rescue from China?
The idea that there is a role here for China or other foreign entities—to lend foolishly to countries to whom the ECB or Germany are too skeptical to do so—simply indicates how confused the whole euro project has become.
Published on Nov 21, 2011
Should China bail out Europe?
China cannot bail out Europe. There are two separate questions here. The first is whether Europe needs to be bailed out, and clearly the answer is that it doesn't. If Europe were suffering from a shortage of foreign currency—for example, if its external debt far exceeded its capacity to raise foreign currency—then it might be meaningful to discuss a bailout. But European entities have very little external debt compared to their capacity to raise foreign currency, so the whole question of a foreign bailout here is meaningless.
The second question is whether the peripheral countries need to be bailed out. The answer here depends on whether or not they are simply facing short-term financing gaps or whether they are truly incapable of servicing their obligations. If it is the former, then the European Central Bank (ECB) or Germany should step in and provide the funding. If foreigners do so, the euro must strengthen against the dollar and with it the European trade deficit will automatically widen and growth prospects in Europe decline. If it is the latter, then debts in the periphery should be restructured and partially forgiven. Otherwise, there is absolutely no way for peripheral Europe to grow its way back into health. The idea that there is a role here for China or other foreign entities—to lend foolishly to countries to whom the ECB or Germany are too skeptical to do so—simply indicates how confused the whole euro project has become.
The second question is whether the peripheral countries need to be bailed out. The answer here depends on whether or not they are simply facing short-term financing gaps or whether they are truly incapable of servicing their obligations. If it is the former, then the European Central Bank (ECB) or Germany should step in and provide the funding. If foreigners do so, the euro must strengthen against the dollar and with it the European trade deficit will automatically widen and growth prospects in Europe decline. If it is the latter, then debts in the periphery should be restructured and partially forgiven. Otherwise, there is absolutely no way for peripheral Europe to grow its way back into health. The idea that there is a role here for China or other foreign entities—to lend foolishly to countries to whom the ECB or Germany are too skeptical to do so—simply indicates how confused the whole euro project has become.
About the Author
Michael Pettis
Nonresident Senior Fellow, Carnegie China
Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
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Recent Work
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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