Throughout November, Johan Van Overveldt, author of the new The End of the Euro, is blogging here twice weekly about the Eurozone crisis.
Major European banks are still struggling with weak balance sheets. The market is very unlikely to provide the extra capital needed to strengthen these balance sheets, since trust in the European banking system is faltering by the day. It won’t be Europe’s governments providing capital to their banks, either. Most eurozone member countries are struggling with their own mounting debt levels. Hence, some observers began discussing another idea few weeks ago: maybe the Chinese could provide capital both to the bleeding European banking system and Europe’s needy governments, either directly or through a recapitalization of the International Monetary Fund.
The Chinese authorities are sitting on international currency reserves worth more than $4 trillion, mostly in US dollars. Of course, it would be very naïve to think that Chinese capital would start flowing to Europe without strings attached. A recent statement by a top Chinese financial bureaucrat gives a sense of how the Chinese are thinking about such a scenario. Jin Liquin is chairman of China Investment Corporation, China’s top sovereign wealth fund, which supervises $410 billion in assets. Jin declared recently that “if you look at the troubles which have happened in European societies, this is purely because of accumulated troubles of the worn-out welfare state. The labour laws induce sloth and indolence rather than hard work.”
Basically Jin Liquin’s analysis is correct. A major overhaul of Europe’s welfare states and labor markets is necessary in order to reduce government debt and get the eurozone economies growing again. It’s just as essential for the Eurozone countries to agree on a real political union in order to save the euro in its present form. Achieving these two aims would require heroic if not outright impossible performances by Europe’s political leadership. Since Europe is unable to live up to the likely conditions China would impose in order to provide Europe with substantial amounts of capital, it’s very unlikely that Chinese capital will be available European countries and their banks.