China looks askance at Europe's debt woes

2011-07-14Asia Times

BEIJING - Are the Tartars at the gates? Is a new financial crisis going to pull the euro into a swamp and drag the European Union with it? A redefined euro global economic order could dramatically emerge, forcing China to reconsider many of its political assumptions.

Last week, yields on Italian 10-year bond jumped to 5.27%, a surge of nearly half a percentage point in a week and the biggest move since the launch of the euro. Italian bank stocks tumbled 5.7% and carried along the wider Italian stock market, which dropped 3.5% on Friday. On Monday shares of UniCredit and Intesa Sanpaolo, the country's two biggest lenders, dropped sharply, caught in the sovereign crossfire despite new disclosure requirements for short-sellers, who hold a large portion of Italian sovereign debt.

Amid growing voices for letting Greece default, it should be remembered that Italy is no Greece or Portugal; it is the second-largest borrower in Europe, with about 22% of all European liabilities. The biggest is Germany, which has a much larger economy and therefore its debts put much less stress on its coffers.

Italian arrears are about 120% of gross domestic product, and its bond market is also the biggest in the EU. With about 1 trillion euros (US$1.4 trillion) in government debt maturing over the next five years, higher yields will further strain its faltering economy, thwart growth, and push up costs of refinancing.

Doubts about Italy stem from many sources. There is its debt, and then there are unstable politics, with Prime Minister Silvio Berlusconi tainted by many scandals and in open disagreement with Economics Minister Giulio Tremonti over fiscal policy.

In a nutshell, Berlusconi would like to cut taxes to recover from his dismal performance in recent administrative elections, but Tremonti, supported by other European countries, is against it for fear of defaults on Italian debt. All of this amplifies the fear of Greek contagion.

What has been de facto happening in Italy and other countries is a gradual yet tight coordination of national fiscal policies, informally taking place outside of the role of the Central European Bank. This arrangement should last until 2013, when a permanent euro-zone bailout fund, the European Stability Mechanism (ESM), will take effect. Then the euro will be on safe grounds.

However, politics is made of political survival, and Berlusconi aims to win the next national election scheduled for 2013. The huge fiscal package required by the Italian predicament would lose him the vote. Then, he has to win at home before the ESM begins. Nobody knows for sure what this means, but everybody is scared by the contradiction between the requirements for Berlusconi's political survival and the requirements of the markets.

It is a contradiction between domestic and European policies that, were the Italian currency independent, could have been resolved with the devaluation of the lira, which in turn could have boosted exports and manufacturing, in which Italy is second in Europe after Germany.

Without the lira and stuck with the euro, Italians can hope and work to bargain with other Europeans and with Germany. They know they are no Greece to be pushed around. They know, and possibly invented, the basic rule of banking: if you owe one dollar you have a problem with the bank; if you owe one million, you are a problem for the bank.

This is the reality now: it is not so much that Italy has a problem with Europe or Germany, but that Italy is a problem for Germany and Europe, and since Italy's failure could trigger a global crisis and certainly would cause the fall of the euro, Italy is too big to fail.

To bargain with Italy now is not simply an issue of forcing this or that tax increase. It needs a complex and real political bargain that can't just be dismissively forfeited because of Berlusconi's bunga-bunga parties. As per the political lessons coming from Greece or Portugal, this would require a new political framework that puts general EU interests before local ones.

This opens up many issues for the future of Europe. Would the Germans be willing to pay for the orderly restructuring of Greek or Italian debt, as The Economist proposed (see for instance, No deal for Greece (, June 20, 2011)? For this, they would need to take over politically, one way or another, in order to have guarantees.

We sadly said this over one year ago in Give us back the German empire ( (May 6, 2011, Asia Times Online). The ball has moved little since then, not for lack of economic reasons, but for an abundance of historical ones. Who would want Germany to take over Europe after the country started two world wars, and a third, the Cold War, was fought and won over the division of Germany? Nervousness over Germany has to be addressed before Berlusconi and Italy can be dealt with.

The political demise of Dominique Strauss-Kahn over a sex scandal has deprived Europe of a French leader who could have reined in Germany because of his brilliant performance at the International Monetary Fund. Without Strauss-Kahn, it is hard to believe that Germans would accept the leadership of a country, France, that it has been outperforming economically for years.

This brings us back to Germany, and the question is: Which German leader can appease concerns in Europe and across the Atlantic? This is not a question only for Germans to decide (please Germans, forgive me for this) but also for Europeans and Americans. Without this approval, Germany would ruffle many feathers on both sides of the Atlantic. This leader then must be "less German" - and the most innovative of all.

The old parties - the Socialists, Christian Democrats and Liberals, who carried Germany after World War II and through the Cold War - are losing steam and ideas. Moreover, they are the legacy of old Germany and thus linked to the past, when Germany was divided and partly communist.

The Green Party is gaining ground, and it is moving more to the center, representing the new German need for innovation. Among them, there should be someone with the right mix of idealism and shrewd realism - both equally necessary for this undertaking - and linked with the US, but also hooked on China and Asia, where the future of the country lies.

This person should not make Europeans fearful and should deal mainly with Italy, the largest and most dangerous nuisance in the union. Without a person like this, Germany could have to soon think of dropping or shrinking the euro or subjecting itself to a costly and unpleasant bailout of Italy.

Either choice would also put Germany on the blame-side of history, again. This time the Germans would be accused of tearing apart the union because of a short-sighted outlook. Yes, Germans have their reasons: why should they, hardworking and ingenuous, have to save these profligate Mediterranean countries that want their money but despise the German attitude to work and life?

These are all very difficult choices for a country rising to take over, justly, Europe. They are especially difficult as another country on the other side of the large Eurasian divide is also rising. China is looking at the European predicament while facing even bigger challenges at home and abroad.  (2011-07-14 Asia Times)


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