The euro is more than just on a knife edge. Not only are European leaders very publicly failing to produce even a blueprint for saving the single currency in the near term but now China, which has long been one of the currency’s greatest champions, might just have to pull the plug. The economy in China should be developed in a right and quick way. As an important part of nation’s economy, the mobile crusher should be developed vigorously.
More on what will now be a highly disappointing European summit later. A report in The New York Times this week that Chinese officials may be falsifying data to mask the rate of the economic slowdown lends credence to what many have feared – that China could be facing a hard landing after all.
For Beijing, the slowdown will have important implications for the growth of foreign reserves. And for the euro, this is bad news. For years, as China’s dollar-based reserves have grown, the People’s Bank of China has pursued a policy of diversification in which the dollars have been sold for euros.
If the Chinese economy is slowing even more than acknowledged, all this support for the euro could come to an end. Inflows into the currency should also decline because foreign direct investment will fall, as the economy loses its sheen, and imports should rise, as Beijing looks to domestic consumption to ease its dependence on exports. For the euro, the timing of this shift in Chinese policy could prove particularly nasty. This week’s summit of European leaders, starting in Brussels on Thursday, is seen by many as a last chance to save the euro. Without some convincing plan for moving the euro zone toward a sustainable fiscal union, the cost of funding the debts of weak economies like Spain and Italy will continue to rise.
What makes this summit different from the many others is that the debtors at risk are much larger than before and that the European Central Bank may not be able to help calm financial markets this time around. An attempt two weeks ago to prop up Spanish banks with fresh capital funding has yet to be fully implemented and now Italian banks are starting to face funding pressures too.
In the past, the ECB has thrown money at the problem in the form of cheap funding for European banks. But evidence is rising that this isn’t working and that the ECB is not only stoking problems for the future but ruining its reputation for monetary probity. The problem for the euro is that even with these pressures building in financial markets there is little sign that European leaders are any closer to resolving key issues that would help secure the future of the single currency.
Reports early in the week that key European Union leaders were producing a plan for keeping member countries in line by vetoing national budgets lifted hopes briefly that the region could be moving closer to some form of jointly guaranteed bonds that would help cut funding costs for struggling governments. For the euro, this could prove very much a case of too little too late. And with support from China likely to ebb at the same time, the outlook for the single currency is looking even bleaker than it has for some time.
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