China's Sovereign Wealth Fund Warns on Euro

The always outspoken head of China's sovereign wealth fund, Jin Liqun, has once again uttered a warning on the still simmering euro area crisis. China of course has quite a few problems itself, and the euro area's economic contraction is actually one of them. Due to its export dependence, China needs Europe to be in better health than it is. Jin evidently realizes that the attempts to solve the crisis have by no means succeeded yet. In fact, he recognizes that the strategy pursued by the eurocracy isn't likely to get anywhere but 'a blind alley', as he puts it. Unfortunately he too cannot really offer a recipe:

„The current strategy is leading us up a blind alley," Jin said of efforts so far by European policymakers to solve the crisis.

He added that the failure of the European Union to deal with its debt crisis was damaging for the world and that "the eurozone needs to strike a proper balance between austerity and growth".

Jin was speaking at a business forum in Beijing. Talking to the Guardian after his speech, he said: "European governments should be given some time … If you ask the Greek people to slash their spending by 30-40pc, it's not possible. So there should be some tolerance, but the determination to carry on austerity should not be relaxed. It is only the issue of how you can balance one against the other."

Jin has previously said that that working harder and longer would help pull the eurozone out of recession. But, the Guardian reported that on Friday, Jin said that recent protests across the eurozone showed that austerity has stretched the public's tolerance "to breaking point".

China's sovereign wealth fund is one of the largest in the world. Earlier this year, the fund said it no longer wanted to buy European government debt.


(emphasis added)

We're not sure what exactly Jin means with his recommendations of a 'mixture of tolerance and austerity', as he didn't go into details on that particular point. Evidently though he can see that the current course has led Europe to a socially and politically explosive juncture. In China the political leadership is extraordinarily attuned to the preservation of social harmony, as that is seen as a guarantee to its own survival. It isn't much different though for the elected politicians of Europe. Today they are facing an ever growing spiral of discontent as the euro area's economies contract.

What makes the situation so explosive can be seen in the chart below – unemployment in the euro area has reached a new record high.




Euro area and total EU unemployment rates have shot to a record high. Obviously there are wide ranges between the different member states, with unemployment in Spain, Greece and Portugal the highest at 25.8%, 25.2% and 15.8% respectively – click for better resolution.



The Core Lacks the Means for a Rescue

By the way, Jin is certainly not the only one who recognizes these things. It is said that many of Europe's decision makers by now also realize that both the analysis and prognosis of the euro project's critics are correct – but they are unable to take or even contemplate the radical steps that would be required to successfully tackle the problem.

At present an unworkable plan to get the peripheral countries to cede their fiscal sovereignty is being pushed by Germany. Obviously Germany does not want to bankroll the euro project without exercising a commensurate degree of control. However, one question that should be asked in this context (see also this recent missive posted at Zerohedge on Kyle Bass' latest letter to his investors) is whether Germany itself actually has the resources to do that, regardless of how much control it has.

After all, Germany itself is not exactly a fiscal paragon and as we have pointed out several times in the past, its banking system is extremely leveraged and opaque. The same is true of France, only everything is a tad worse  – not to mention that the new socialist administration of France is the incarnation of economic ignorance.

To create a centralized European superstate has long been a dream of France's socialists by the way. The EU was driven off the course intended for it by its founders primarily by figures like Francois Mitterand and Jacques Delors. Germany's political leaders meanwhile have become so deeply invested in the 'Franco-German friendship' project that they have in the end always given their nod to everything France has demanded in terms of European policy, in spite of all their hemming and hawing.

However, the euro area's core can actually not be expected to rescue the sinking ship in the long run. It will sooner or later be forced to think about rescuing itself.



Germany's public debt in billions of euros as at the end of 2010, via Süddeutsche Zeitung. Europe's fiscal paragon? How can it be expected to bankroll the euro project?  The answer is that it actually can't – click for better resolution.



The Prison of Debt

In fact, as Der Spiegel points out in a recent article, the entire developed world finds itself in a 'prison of debt' these days. Early on in the article the root of the problem is correctly identified: the ability of fractionally reserved banks and the central banks that backstop them to create credit and money from thin air almost without limit. It also acknowledges that the cutting of the dollar's tie to gold in 1971 was the last straw that allowed debt and the money supply to enter a terminal exponential growth phase. In other words, it really is no big secret anymore what the problem actually consists of. And yet, no-one seems to know how to deal with it. It is still not even up for debate in establishment circles, with the occasional exception provided by figures like Jens Weidmann, the conservative president of the Bundesbank.


So why not ask the advice of the economists of the Austrian school, who have always been critical of this monetary system, tirelessly pointed out its flaws and offered alternatives galore along the way? Not only are they the only ones who have analyzed the problem in depth, they are also the only ones who truly understand the economic effects of credit expansion by dint of possessing an extensive capital theory – a subject woefully neglected by other schools of economic thought.

The transition to a system of sound money won't be an easy task, but how can it be avoided in the long run? Unfortunately is seems that only a major crisis will create the necessary incentives – and even such a crisis is not necessarily a guarantee that a sound monetary system will be adopted. In fact, it is our distinct impression that not a whole lot has been learned as of yet from the crises that have struck to date.



Unemployment in the euro area's periphery, plus US and German federal debt at a glance, via Der Spiegel – click for better resolution.




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One Response to “Euro Area – It Isn’t Over Yet”

  • No6:

    Only a hyperinflation and currency collapse can hope to cure this mess with a sound money outcome.
    Austrians point out the need for recessions as a correction to credit expansion. The west has gone way beyond the stage of recession or even depression repair. It needs a full and total catastrophic crash to wash out all the vested interests and the festering political system.
    Democracy is not self correcting. Like a bicycle, wants beyond a certain tipping point it will fall down.

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