China bails out Italy?
Italian Prime Minister Silvio Berlusconi.
September 19th, 2011
04:30 PM ET

China bails out Italy?

By , GlobalPost

In recent days, Italy became the first major Western economy to turn to China for what amounts to a bailout. Italian officials confirmed last week that they held talks with China’s $340 billion sovereign wealth fund about buying Italian government bonds.

Little was written outside the financial press about this development. In Italy, where national debt now exceeds 120 percent of GDP, news that senior officials had set up a hotline to the cash-rich East was greeted as a sign of hope as the bond markets threaten to shut down the Italian government's access to capital.

Italy, the eighth largest economy, is a founding member of the U.S.-led Group of Seven (G-7) club of industrial economies that until recently called the shots in the global economy. Not long ago, the idea that a global export and financial powerhouse like Italy would turn for assistance to China, the chief proponent of authoritarian state capitalism, would have raised alarm bells in the United States. America would have scrambled to engineer a rescue, as it did in Mexico in 1994, South Korea in 1998 and Brazil in 1999 — and as it had for Europe both financially and militarily, in two world wars.

Read: China's Europe aid, the view from Beijing.

China previously has stepped in to offer loans to far smaller economies, including Portugal, Spain and Greece. It also helped investment banking giant Morgan Stanley stave off collapse by purchasing a large share at fire sale prices during the 2008 global financial crisis.

Italy’s appeal to China, however, signals something new.

The past three years have delivered a stark reality check to the American superpower. Offering financial help to even its closest allies these days would be an exercise in keeping up appearances. America — and Japan, Britain, France and, yes, even Germany, have their own deep financial problems.

Instead, the Italian-Chinese talks sparked a statement from Brazil's finance minister announcing that the so-called "BRICS," Brazil — Russia, India, China and South Africa — will meet on Monday to see what can be done for the sick man called "Europe."

As the perpetual crisis in the most developed economies indicates, the world that emerged out of the cauldron of the American century is unraveling. The decline of U.S. economic and political influence is clear, as is the rise of the BRICS and other emerging powers. Much has been written about the policy mistakes, demographic problems and debt woes that beset the old “West” and its Asian protege, Japan.

Read: Brazil's new rules.

But most analysts have underestimated the potential speed of American decline. Very few have grappled with the consequences for U.S. and its allies as the American-led status quo across the globe begins to fray and even break apart.

Do not be fooled: America's global military dominance rests entirely on its ability to pay its bills. Military juggernauts with dysfunctional economies end up in the same predicament, most recently exemplified by the fall of the Soviet Union. By the time the USSR was declared dead, even the Soviet military — only 20 years earlier a match for any on the planet — had deteriorated to the point where recruits had starved to death at one military base; warships rusted at their moorings for years; and control of the military's version of the crown jewels, the nuclear arsenal, was seriously under threat.

No direct comparison can be drawn between the incompetence of Soviet state central planning and the flaws of American-designed global capitalism. The U.S., for all its mistakes over the past several decades, remains the vital player in global economics, and will remain the world's largest for decades to come.

But therein lies the planetary danger: the Soviet economy's collapse affected primarily a small group of similarly distorted economies tied to it through communism's version of the Commonwealth – called Comecon. For Cuba, Eastern Europe, selected African despotisms and Moscow-friendly India, it was a disaster. For the rest of the planet, it was pleasant surprise and an opportunity.

In contrast, the U.S. economy is so large and the rest of the planet’s holdings of dollars and U.S. debt so endemic that America’s fate concerns everyone, friend and foe alike. China, Russia and the Gulf emirates fear an American debt default far more than American military might — as their chiding of U.S. fiscal prevaricating shows.

China has made similar appeals to European economic policymakers, urging them to put aside the domestic political concerns that so far have taken precedent in the rich E.U. countries, preventing a true solution to the tumbling dominoes of the euro zone periphery, the so-called PIIGS: Portugal, Ireland, Italy, Greece and Spain.

The U.S. and China, along with all major economies that depend on selling goods to the gigantic E.U. market, are terrified about the prospects of a “lost decade” taking hold in Europe. Such stagnation would further collapse demand and consumption that’s already struggling in the absence of the once-spend-happy American consumer.

Partly for that reason, last week the Fed and European Central Bank reestablished a "swap" capability so Washington could pump money into Europe's banks if worst comes to worst — a move seen as crucial to Europe’s vast economy.

But politically, the implications are deep and so far unappreciated. Think of it: the uncontrolled unraveling of Lehman Brothers, a second-tier investment bank, nearly caused the global financial system to crumble in 2008. And now, the threat of default of a small sovereign player like Greece could destroy the European Union’s common currency. In comparison, the uncontrolled unraveling of U.S. power would be a disaster of global proportions.

Read: Egypt's new democracy.

Britain’s long retreat from global dominance in the early 20th Century sparked civil wars and left geopolitical Gordian knots like Kashmir and Palestine and Northern Ireland all over the planet. Likewise, the pull back of American power in our time will expose, for the first time in decades, parts of the geopolitical shoreline that American power, political will and diplomatic influence have heretofore sheltered.

It could be that the world suffers right now from a kind of "crisis fatigue." After all, the spectacle of European economic powers appealing to China for massive purchases of their shaky government debt follows on some truly scary episodes:

- the effective bankruptcies of three European states — Greece, Ireland and Portugal, met feebly by European Union politicians with half-measures, parochialism and denial.

- the battering of Japan’s economy by a combination of natural, man-made and policy-induced disasters, a combination that has it well into a third consecutive “lost decade” of debt and low growth.

- the theater of the absurd in Washington, with know-nothing politicians threatening to default on the United States debt and sparking the richly deserved downgrade of its long-term credit rating from AAA+ to AA+ by Standard & Poors.

Well, sorry for the fatigue. But as the great Al Jolson said in 1927, on the cusp of another great calamity, "Folks, you ain't seen nothing yet!"

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Topics: China • Debt Crisis

soundoff (19 Responses)
  1. j. von hettlingen

    If China wants to bail one of the PIIGS-countries out: Portugal, Ireland, Italy, Greece and Spain, it will definitely be Italy. Berlusconi knows how to entertain and make somebody feel good and important. We in central and northern Europe are less bons viveurs. Through Berlusconi the Chinese will show a taste for the Italian dolce vita: wine, food, cars, fashion and landscapes.

    September 19, 2011 at 6:49 pm | Reply
    • Jose

      And gold bullions for sure.

      September 19, 2011 at 9:31 pm | Reply
    • 100% ETHIO STRONGER!

      The West kept misleading the Medias for quiet long time, about Chinese human rights, bla bla...
      Now, we know it was jealousy.

      September 20, 2011 at 12:06 am | Reply
    • j. von hettlingen

      This Eurocrisis should offer us the golden opportunity to solve the monetary Gordian's knot! People in the Eurozone should be given the chance to vote for an exit. The Euro, a so-called crowning achievement of European Unity turns out to be a chronic patient. Due to cultural, lingual and fiscal-political disparities a total assimilation is unthinkable. Better jump now and save one's life, rather than drowning together in a sinking boat.

      September 20, 2011 at 5:50 am | Reply
    • dogface

      poor china bailing out rich italy....are we insane?...

      September 24, 2011 at 2:27 pm | Reply
  2. Bill

    Don't do it! The EU have done nothing for China except their conquest and expoitation! So what if an market will close? It will hurt the EU way more than it will hurt China. Besides, it's not like they are begging nicely, did you know, not long ago the EU actually had the nerve to call Chinese investment in EU "Reverse Colonization"??? Such arrogance is beyond saving.

    September 19, 2011 at 11:00 pm | Reply
  3. 100% ETHIO STRONGER!

    So, why the Western Media kept criticizing China about Human Right, Child labor and then against Chinese investments everywhere. Even NATO said, Chinese making Business partners by the costs of Western Lives.

    Let US be real. Now, everyone owes so much Money for China.
    Is it jealousy on China? I myself, never get anything from China.

    September 20, 2011 at 12:02 am | Reply
  4. bash schindo

    Can china bails italy! If yes how!.

    September 20, 2011 at 3:10 am | Reply
  5. Lawrence

    The West have to face it and bite the bullet irrespective of what China is doing. The Western economic model and all those theories, assumptions, condemnation of others ... etc are mere rubbish that lead the Western economy to what it it is today. Better bite the bullet and face reality.

    September 20, 2011 at 9:18 am | Reply
  6. swoosh

    Italy is one of the most hostile nation to China trade, why should China bail it out? especially since the PM of Italy himself is wasting money for women and luxury.

    September 22, 2011 at 3:33 am | Reply
  7. W.B. Chase

    The U.S. can't afford to do it because it is going broke! ???? As Seth Meyer would say on SNL's WeekEnd Update program: "REALLY??? !!!". And 99.1 percent of all economists actually believe that it is possible for the U.S. to go broke. REALLY? 99.999% of all physicists once believed that light traveled in the aether. Oh yeah, and Einstein laid in wait for YEARS 'til t finally 99.999 believed him to be RIGHT. Hey people, get a CLUE!!!!! Never could happen. If we leaved in OZ, you could just click your heels together and figure out the logic of this one.... Come on people, our nation is not just broad, it is DEEP. more tomorrow. Cheers.

    September 23, 2011 at 3:44 am | Reply
  8. dogface

    poor china bailing out rich italy....are we insane?...keep china money in china to spur domestic consumption by its poor citizens...no need to prop up world economy and export to lazy rich of the west..

    September 24, 2011 at 2:27 pm | Reply
  9. dogface

    keep china money in china to spur domestic consumption by its poor citizens...no need to prop up world economy and export to lazy rich of the west..

    September 24, 2011 at 2:28 pm | Reply
  10. Kim Paul

    Agree with you Dogface..BUt this is quiet absurd..The whole world is under recession as a result every country is being affected..At this point of time it is quite difficult.One of my friend's business is vastly affected by this but his online presence saved him which was created by http://www.msoft-technologies.com.

    September 26, 2011 at 3:21 am | Reply
  11. karldavid

    Aaahhh....it was "You ain't HEARD nothin' yet!" Because, The Jazz Singer was the first widely-exhibited talkie. Not to pick nits....

    October 11, 2011 at 6:31 am | Reply

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