Andy Xie: Europe’s is a money distribution problem
This quote from Andy Xie comes via FT blog Beyondbrics. He was arguing that the Chinese should stay well clear of becoming another player in the European sovereign debt crisis:
“Europe has enough resources to solve its problem.” Greece’s total debt is €350 bn, compared to over €8,000bn in the eurozone’s GDP. The eurozone is roughly balanced in international trade. “It is a money distribution problem within. In terms of fiscal deficits, by Asian standard, the cuttings required are relatively small. What Asian economies did after the Asian Financial Crisis were several times as big. It just doesn’t make sense for others to help Europeans when they could help themselves.”
That’s it exactly. A few days ago I asked myself what would happen if you just got rid of the debt.
The answer I came up with is that we would see a hugely productive economy. Think about all of the built up infrastructure, plant and equipment, and people in the developed and developing economies. it’s immense. Without the debt, with a clean slate, companies now cautious, would hire people like crazy and starting making stuff. The economy would sprint forward like a lion.
The point is that Europe has an enormous productive capacity, Greece included. Debt introduces a money distribution problem that becomes a flashpoint during periods of economic weakness because the inability of large debtors to pay imperils both the debtor, the creditor and everyone whose income is derived from those sources. If the debtors are large enough as in the sovereign debt crisis in the euro zone, you get a systemic crisis that often leads to depression.
The European sovereign debt crisis is all about apportioning losses between debtors, creditors, and taxpayers from debts that simply cannot be repaid in real terms. The various sides are overplaying the hands they were dealt. Apportioning those losses quicker prevents the kind of downward spiral we are now seeing.
I agree with the two Steves, Steve Roach and Steve Keen, we will have to see debt widescale forgiveness across the advanced economies before this is over. However, realistically, people are too attached to their negotiating positions at present for this to occur now. The economic situation will have to deteriorate much further before debt forgiveness becomes a viable solution.
Source: Andy Xie: China shouldn’t aid eurozone – Beyondbrics