A Tie Between the Fates of Greece and China

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Greece is on the “razor’s edge” of default, its financial minister Evangelos Venizelos said. The International Monetary Fund said China’s GDP growth could collapse if the eurozone’s troubles increase. The IMF reported its forecast of China’s 2012 GDP increase could drop by 4% from the current 8.2% level. The agency said China has the reserves to help it build a buffer against the eurozone storm, but even those buffers may not be sufficient. Greece, the weakest nation in the eurozone, with a GDP of $305 billion, is more closely linked to China, with its $5.9 trillion GDP, than might seem evident at first.

Greece remains the most significant example of what is wrong with Europe. Its economy has almost no manufacturing, and what it has is not efficient. It cannot compete with nations worldwide, except perhaps as a tourist destination. China is the most efficient manufacturer in the world, but the critical nature of its ties to Europe increase by the day. As its PMI numbers falter, many economists blame a drop in demand of finished goods from the EU, now the world’s largest economy — larger even than the U.S.

China has offered to help Europe by possible investments in the IMF, the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF). The People’s Republic has made it clear that this is not an attempted takeover of Europe’s finances. It is in the self-interest of the Asian nation to help Europe, it has assured EU officials, most recently as its top politicians met with Angela Merkel.

But financial aid will not ease the factors that make Europe a less likely market to consume China’s finished goods with robust demand. Greece has fallen deeply into recession. It has been followed by Portugal and Spain. Some economists believe that even Germany and France have succumbed. If all of those things are true, the IMF’s concerns about China are almost certainly accurate, and the agency’s downside forecast likely will be accurate.

Greece was the earliest example of what is wrong with the eurozone now: high debt worsened by an economy that cannot compete with most others in the world. As much of Europe falls into a similar position, China’s chances of a hard economic landing grow so fast that it may happen this year.

Douglas A. McIntyre