Could the BRICS rescue the European Union? Leaders from four of the world’s fastest-developing economies–Brazil, Russia, India and China–plan to discuss joint aid to debt-stricken Europe when they meet in Washington on September 22.
Among the BRICS, Brazil seems most keen on providing assistance, with both its president and finance minister publicly declaring Brazil’s support for the EU. Brazilian newspaper Valor Economico reported that the BRICS might use their cash reserves to purchase German and U.K. bonds. However, Reuters reports that the other nations seem less than enthusiastic at the prospect of bailing out the EU: Russia’s central bank is “maxed out” on euro-denominated assets, India has expressed caution thus far, and South Africa remains undecided.
But what of China? The world’s fastest-growing economy is sitting on the world’s largest foreign exchange reserves at $3.2 trillion, with an estimated $1.7 billion flowing in every day. Given the circumstances, it’s hard to blame the EU’s cash-starved economies for eyeing the Asian cash cow. Italian officials recently met with China’s sovereign wealth fund, the China Investment Corporation, sparking speculation that Italy had asked China to buy Italian bonds (an allegation Italy denied). However, an adviser to China’s central bank has urged caution in buying euro area bonds, suggesting that China invest in major Western companies instead. China has accumulated approximately 800 billion euros’ worth of eurozone bonds over the past decade, and its central bank suffered a major loss from buying Portuguese debt prior to the eurozone crisis.
Last week, Chinese premier Wen Jiabao expressed support for Europe but also stressed the need for economic reform in EU nations, stating, “Countries must first put their own houses in order.” In a bold move, Mr. Wen offered to help Europe in exchange for EU recognition as a “market economy,” a designation that would adjust the way the EU imposes tariffs on Chinese exports. Under the new designation, China would be able to export more low-cost goods to Europe. China is scheduled to receive market economy status in 2016 but would prefer it sooner.
Assisting the EU seems like a logical choice for the BRICS. A eurozone debt default could negatively impact emerging economies, which export many of their goods to industrialized nations, and could ultimately dampen global growth. That being said, it’s uncertain how much a bailout would actually help. While a cash infusion may temporarily ease the European debt crisis, it won’t address the structural weaknesses that pulled the eurozone into its current financial sinkhole. Furthermore, those countries that buy bonds from debt-addled nations such as Italy (fresh off a credit downgrade and holding more debt than Spain, Greece, Ireland and Portugal combined) would face a high degree of financial risk. Some analysts are skeptical about whether the BRICS, each with different priorities and undoubtedly protective of their burgeoning economies, can even reach a consensus this week.
Whether the EU capitulates to China’s requests, or Brazil’s cheerleading brings the three remaining BRICS around, remains to be seen. The next two weeks will be critical for the eurozone, as a series of pivotal high-level meetings related to the debt crisis are scheduled to take place over the period. With pundits (and billionaire George Soros) predicting a Lehman Brothers-style eurozone collapse, it’ll take much more than a few BRICS to repair the eurozone.
We’d like to hear your take on the eurozone debt crisis. Should the BRICS purchase the government bonds of eurozone countries? Would a bailout have a significant impact at this point, or is the EU headed for an inevitable meltdown? Post your opinion in the comments (and don’t forget to sign up for the RedChip stock challenge).