It’s official: the world economy is completely upside down.
What else is one to think as Europe goes hat-in-hand to developing China and feeble Japan? You would think China had better things to do with its cash than shore up a sinking euro zone. The same goes for Japan, where deflation and paralysis may soon deliver the sixth prime minister since September 2007.
Japan plans to buy bonds issued by Europe’s financial-aid fund, joining China in assisting a region battling a fast-spreading debt crisis. Bailouts of Greece and Ireland merely pave the way to even bigger ones of Portugal, Spain and, perhaps, Italy.
Yet here’s something even bigger to consider: what the world really needs isn’t China’s and Japan’s excess cash, but more balanced and sustainable growth in Asia’s main economies.
Europe’s debt woes are just beginning. No matter what the region’s policymakers do, they’re still stuck with a currency they can’t devalue and massive and growing debt loads. Buying Europe’s debt may put a Band-Aid on things, but China and Japan can’t stop the inevitable worsening of the euro crisis.
Japan, flush with more than $1 trillion of reserves, also is thinking as much about diplomacy as economics. Helping Europe in its time of need will score points for a nation losing power and prestige. Japan’s aid seems more of a me-too gesture to match China than a long-term strategy.
It doesn’t seem like a huge risk, either. The European Financial Stability Facility will raise as much as 16.5 billion euros ($21 billion) to help bail out Ireland. It plans to issue between 3 billion and 5 billion euros of AAA-rated bonds later this month, of which Japan may buy more than 1 billion euros. As Europe’s debt mess worsens, though, Japan’s investment may go bad in a hurry.
Rather than tossing money around, Japan should get busy reviving its economy once and for all. It should act boldly to encourage entrepreneurship, learn to live without huge government borrowings and zero interest rates, increase immigration, raise productivity and boost competitiveness. Unfortunately, it is doing none of the above.
China, meanwhile, should close the checkbook and instead fix imbalances that destabilize markets. The first step is faster yuan appreciation. China shouldn’t do it because the United States is demanding action, but because it’s in China’s interest.
Higher borrowing costs and regulatory tweaks aren’t enough. A big yuan revaluation would help officials in Beijing regain control, while raising the international purchasing power of 1.3 billion people. It’s great that China is voicing support for Europe and backing it up with bond purchases. It would be even better if China restructured on its own.
China’s financial might is a product of its $2.8 trillion of currency reserves. Yet Asia’s savings won’t be enough if a key economy like Italy crashes, and it can’t be ruled out.
It’s no longer debatable whether the global financial system is upside down. The shift began with the realization that economies such as China, India and Brazil might eclipse the U.S. in the next 30 or 40 years. It got positively tectonic once the savings of developing nations began shoring up economies viewed as role models less than a decade ago.
You also know things are wildly off-kilter when the West’s financial rot is seeping into the East. Thailand’s 1997 devaluation set in motion a regional crisis that had the Dow Jones Industrial Average plunging several hundred points on single days. Now, the West is returning the favor. •
William Pesek is a Bloomberg News columnist.
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