This Thursday, in Washington, finance ministers and central bank governors of the BRICS group of emerging powers – Brazil, Russia, India, China and South Africa – will get together and, in the words of Brazilian Finance Minister Guido Mantega, “Talk about what to do to help the European Union get out of this situation.”
Hold your horses. Is this an emerging cavalry to the rescue? Could this be the end of the eurozone (eurotrash?) self-induced liquidity panic? Or is this just the BRICS graphically showing the writing on the wall – pointing to which way the economic wind is blowing?
The basic (Brazilian) idea is for BRICS financial muscle to buy some extra European sovereign debt. But only “solid” bonds – from Germany or the United Kingdom – would qualify. The rationale is that BRICS will win by diversifying reserves – China at $3.2 trillion, Brazil at over $350 billion, India at over $320 billion – and make more money than investing in US Treasury bonds.
The thing is selected BRICS have been diversifying their reserves for quite a while – especially China, as well as Brazil (which still remains the US’s 4th biggest creditor, with over $210 billion).
There will be much to debate in Washington. India is not very enthusiastic. Nor is Russia; Moscow, via Arkady Dvorkovich, President Dmitry Medvedev’s chief economic adviser, stated flat out that the Europeans must come up with a clear strategy for rescuing the PIGS (Portugal, Ireland and Italy, Greece, Spain) before Moscow starts buying more eurozone bonds.
I wanna bite your apple
As for China, ask not what Beijing could do to Europe; ask what Europe has done to Beijing. Well, not much. The bombing by the North Atlantic Treaty Organization (NATO) of Libya into democracy translated into massive losses for China, including the lightning repatriation of over 36,000 Chinese workers, and cancellation of dozens of contracts. Not to mention that NATO’s war was fundamentally opposed by the BRICS – and the “NATO rebels” in Libya have already threatened to sideline Brazilian, Chinese and Russian companies from the fresh Libyan loot.
What Beijing really wants can be gleaned from what top adviser to China’s central bank Li Daokui said at the recent World Economic Forum in Dalian, “The incremental parts of our foreign reserve holdings should be invested in physical assets.”
Translation; “We would like to buy stakes in Boeing, Intel and Apple, and maybe we should invest in these types of companies in a proactive way.” Daokui said there is an astonishing “$10 trillion” waiting to be invested in the US; over the collective dead body of the Republican party, one might add.
Daokui also said that only after “the US Treasury market stabilizes” would China be willing to “liquidate more of our holdings of Treasuries”.
The operational word here is “liquidate” – not “diversify”. That is, Beijing really wants to get rid of all those US dollars. Meanwhile, it will keep buying any available foreign assets in sight – as well as, inevitably, US dollars. Europeans should not get too excited; Beijing is as fond of euro debt as it is of dollar debt. Actually euro debt is now regarded as even more poisonous.
The return of the European dead
Critics of the Brazilian plan say the EU does not need a bail out. It is already awash in all those euros they print; what they need is “fiscal discipline”. Additionally, it’s a bad investment; the euro will inevitably lose against the yuan, the rouble or the real, and some eurozone countries may even default.
French economist Emmanuel Todd – who was predicting the decline of the US already before the invasion of Iraq – ranks the euro as a “zombie concept”. Indeed – in the sense that wealthier northern Europe will never be ready to open their wallets to help southern Europe to reach an equivalent economic level.
National egoism rules. The euro is too expensive for Greece, Portugal, Spain, Italy and even France. The euro’s rate in relation to the US dollar is adapted to Germany or the Netherlands, not for southern Europe. For these countries, the euro is like a cluster bomb on their growth.
And because the currency is so strong, companies are unable to export. They delocalize like crazy. And unemployment shoots up. That’s why leaving the euro is a solution for all these countries whose competitiveness is in trouble. They can devalue their currency and get back in business.
But then there are the cons. Technically, for these countries to get back to their national currencies – say, the drachma, the peso, or the lira – is already a major headache in itself. Then these new (old) currencies will obviously fall; according to ING projections it would be something like 50% for Greece and Spain.
This means their debt, as well as the debts of their companies – denominated in euros – will rise exponentially. And the same for inflation; it would be parked in double-digit territory.
The only realistic solution for the European crisis would be a move towards a federal Europe (think of the United States of Europe). That would imply that the accumulated debt of all these countries would be Europe’s debt (and also imply, on a positive register, no more speculation). The economy would be centralized, managed on a European-wide scale.
There’s absolutely no evidence European-wide citizens are ready to accept such a project. Thus, the crisis is never-ending.
I want security, yeah
The BRICS’s ultimate fear is that this perpetual eurozone wasteland plus American stagnation will lead to a global contraction also wreaking havoc all across Asia, South America and Africa.
Public opinion in the development world has long memories. Many would dream that as much as the IMF “helped” the global South by applying its dreaded “structural adjustments” – deregulating everything in sight and transferring more wealth to the already wealthy – the BRICs might now impose their own rules to “save” Europe.
That would be, in practice, permanent seats at the UN Security Council for the “B” and “I” in BRICS (“R” and “C” already have it). Brazil would demand real free trade in agriculture. And China would demand real freedom of investment.
But everyone knows that won’t happen.
Another possibility – in terms of helping not only Europe but the global economy as a whole – would be for all BRICS to launch massive infrastructure projects. Then EU and US funds would be “encouraged” to get into the action. China already did it, and Brazil is doing it; but these massive investments in infrastructure are largely locally and regionally minded, and are not translating into more jobs for Europeans or Americans.
Even crisis-hit Western Europe, as a whole, is still the number one economy in the world; according to The Economist, a little less than 24% of the global total, compared to the BRICS at 21%. Yet the Europeans hold 32% of the votes at the International IMF, while the BRICS control only 11%.
So maybe that’s what the BRICS are really after; they want to force a new correlation of forces at the IMF. To this end, why not undermine the power of the US dollar a little further, and to defy Europe a little more forcefully; but without betting on the US dollar, or the euro, or both, crashing. Sun Tzu would give it the thumbs up.