NOTWITHSTANDING the recent agreement to amend the EU treaty, the world’s financial markets are not reassured. A solution to the Eurozone debt crisis is still wanting, and many believe that the world’s emerging economies could provide it. As a collective driving force they might be able to stop the debt contagion, but the question is will they?
China, in particular, is considered the best hope for the developed world, and many of the Eurozone’s major political players are hoping they can pull off an investment coup by soliciting their help. So far, it’s to no avail, as China still sees the Eurozone situation as too risky. While the EU summit did yield some positive results, it’s not clear if it’s enough for Beijing to have a change of heart. In any event, the Eurozone’s leadership shouldn’t wait too long to ask.
Data shows the Chinese economy is slowing with recent analysis expecting growth in 2012 to slip to a decade low of 9 per cent. Beijing has taken the official position that its own growth is the new priority. That means the government may focus more on internal stimulus rather than external investment, so more tweaking to monetary policy can be expected. If internal stimulus measures increase substantially, any hope that China will be able to invest anywhere else in the world will begin to fade.
China’s willingness to invest is another issue. Firstly, they clearly have little faith in the Eurozone’s leadership to stage a credible plan for economic recovery. Secondly, Beijing is obviously unhappy with the anti-China sentiment that has become fashionable of late, especially in the US Congress. Trade bills aimed at protecting US interests were first verbally condemned by Beijing, but now they have sparked retaliatory measures. The government intends to impose duties on car part imports from the US which would affect several large international automakers.
ANOTHER BRIC IN THE WALL
The situation is not all that dissimilar among the other Brics. Even if they wanted to invest, Russia’s economy is expected to grow more slowly in 2012, and recent public rioting and demonstrations – unprecedented in scope – suggest a growing anger with the current government who likely won’t make any major commitments until things settle down. Brazil, the second largest emerging economy, saw its economy contract in the past quarter and growth estimates for 2012 are around 3.5 per cent. Like China, India is trying to balance inflationary pressures and internal growth, but its economy is simply too fragile to consider anything but infrastructural and social improvement. The bottom line is that the Brics’ respective leadership may determine that internal growth is a higher priority than investment.
Should they decide to help, the Brics’ leadership would expect some quid pro quo for their financial assistance, namely recognition of their economic equality. Simply put, the Brics want their 21 per cent contribution to the aggregate global economic weight to afford them voting rights of a similar amount to that which is accorded to the EU with its 24 per cent contribution. The developed nations have been reluctant to acknowledge any disparity, and thus far, the IMF’s leadership, namely Christine Lagarde, hasn’t encouraged the discussion of redistribution of IMF voting rights, despite the fact that the Brics threw their weight behind her.
With all of these factors currently in play, the scale of global trade is likely to decrease further, which would adversely effect global growth. Moreover, it could shake what is generally tenuous political stability among the Brics. And because every nation depends on growth for stability, the backlash created by the decline in global trade will make it even harder to recover, and the downward spiral will dampen global demand.
The only asset poised to gain from distrust, lack of faith, and crumbling alliances is the US dollar, with most commodities and indices trading against it losing value. The most prominent example is the collapse in gold and silver prices, which abruptly ended a multi-year bullish trend and is attributed to the lack of support from the Brics and lack of action from the Eurozone’s leadership.
All of which raises the prospects of a credit crunch, followed by a collapse in inflation expectations. Simply put most assets, from commodities to indices trading against the dollar, will shed their value.