European leaders say they will do “whatever it takes” to save the eurozone. It is likely China won’t do much less.
Respected commentators such as Eurointelligence reckon the eurozone will either need to print up to €2 trillion (£1.7 trillion) to buy state debt or bring governments’ pledges to its bailout fund up to the same level.
Serious objections to both plans remain, however. The first could crash the currency, increasing the supply of euros massively compared with demand. The latter could transfer gigantic spending from one government to another, in a fiscal union which, under current conditions, would be politically unacceptable.
But amid wrangling over internal European support, a potentially gigantic new source of funds has arisen: emerging market reserves, led by China.
China and other developing nations have committed a disproportionate amount of their enormous reserves and other foreign currency assets to American government debt.
Partly as a result of this, American government debt is in a bubble. This allows the American state to borrow even more and print huge sums to prop up the market.
China and its peers, by contrast, have committed relatively little to peripheral eurozone governments, which are having to bear an unbearable amount of austerity.
This imbalance is little discussed, but is potentially a source of further financial instability.
However, it seems the Chinese in particular have woken up to this issue and are now buying peripheral eurozone debt, helping ease the problems in Europe, which is now its largest export market, according to the World Trade Organisation. (article continues below)
If China is propping up America, its second major export market, and keeping the purchasing power of its currency high against the renminbi, it should surely do the same for Europe.
Moreover, China is getting a much better interest rate on eurozone debt relative to its own inflation than it would get on American government bonds.
Supporting Europe is not without its risks. It may mean China and other emerging markets have less resources available for America and for their own economies, if they experience any difficulties.
Given its despair over America’s deficits and money printing policy, China in particular could withdraw some support. This would deliberately or accidentally engineer a soft landing in the American government debt market.
This would raise interest rates on American debt and spread the burden of austerity across the Atlantic, rather than concentrating it in the eurozone periphery.
The policy risks a hard landing for the American markets, which would be bad for China and by extension for other emerging economies.
However, China and other sovereign wealth holders have probably come to regret not recapitalising Lehman Brothers before its default in 2008.
Given the chaos that ensued in the latter months of that year, it is unlikely they or European leaders will want to repeat the same mistake.