November 11th, 2011
01:00 PM ET

Fareed's Take: Only China can save Europe

By Fareed Zakaria, CNN

The European crisis that you've been reading about in the paper is worth watching carefully. In fact, it has now morphed into something much bigger than a European crisis - it could batter the entire global economy, which is pretty fragile anyway.

You've read a lot about Greece, but the problem in Europe is Italy. Greece is a nano-state; it makes up about 2% of the European Union's gross domestic product. Italy, on the other hand, is one of the seven largest economies in the world. Its debts are greater than those of Spain, Portugal, Ireland and Greece combined. It has long been governed in an almost cartoonishly bad manner. Italy is too big to fail but might also be too big to bail. Even Germany might not be able to credibly bail it out along with all the other troubled countries. So what can be done?

I don't think the leading proposals will work - creating Eurobonds or giving Brussels broader power to tax. They're simply not going to happen. Governments oppose it and people oppose it. And anyway, creating a tighter European Union will take ten years. Markets needs reassurance now.

So I have a proposal: We need a big bazooka. Facing a similar crisis in 2008, then-Treasury Secretary Henry Paulson talked about the need for a sum of money large enough to scare markets into submission. A bazooka. But the problem is this: All of the EU combined doesn't have one big enough. So who has the kind of money Italy needs?

Take a guess? They have $3 trillion in foreign exchange reserves. Yup, China. In fact, today, 10 trillion dollars of foreign exchange reserves are sitting around across the globe. That is the only pile of money large enough from which a bazooka could be fashioned.

The International Monetary Fund could go to the leading holders of such reserves - China, but also Japan, Brazil and Saudi Arabia - and ask for a $750 billion line of credit. The IMF would then extend that credit to the troubled EU economies, but insist on closely monitoring economic reforms, granting funds only as restructuring occurs. That credit line would more than cover the borrowing costs of both Italy and Spain for two years. The IMF terms would ensure that the two nations remained under pressure to reform and set up conditions for growth.

Now, the Chinese would have to devote at least half the funds. What's in it for them? A new global role. This could be the spur to giving China a much larger say at the IMF. In fact, it might be necessary to make clear that Christine Lagarde would be the last non-Chinese head of the organization.

In a world awash in debt, power shifts to creditors. After World War I, European nations were battered by debts, and Germany was battered by reparation payments. The only country that could provide credit was the United States. For America, providing desperately needed cash to Europe was its entry into the councils of power, a process that ultimately brought a powerful new player inside the global tent. Today's crisis is China's opportunity to become a "responsible stakeholder" in the global system. If this doesn't happen, hold on to your seat because we're in for a rough ride.

For more of my thoughts throughout the week, I invite you to follow me on Facebook and Twitter and to visit the Global Public Square every day. Also, for more of my takes, click here.

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soundoff (314 Responses)
  1. Gjask

    I believe is this a great opportunity for China to buy the European Union.

    November 13, 2011 at 2:01 pm | Reply
  2. edward simone

    SUGGESTION RELATING TO IRAN'S NUCLEAR WEAPONS PROBLEM AND WHAT MIGHT BE DONE: As was the case in IRAQ, Hussain was given an option (supported by the International Community through the United Nations) to allow inspectors in. Hussain was warned several times and given every opportunity to comply, but refused. He was given a final ultimatim to allow inspectors to come in to verify within 48 hours, but refused again. SO IT WAS HE THAT CAUSED THE IRAQ WAR BY HIS REFUSAL TO COMPLY, REGARDLESS WHETHER IRAQ DID OR DID NOT HAVE WMD'S.

    A SUGGESTION AS TO WHAT THE U.S. SHOULD DO ABOUT IRAN: Attempt to garner the support of the International Community once again (through UN or otherwise) in order to give Iran the chance to let a sufficient number of Nuclear Inspectors, into the country to VERIFY what they are claiming (that they are trying to produce nuclear power for peaceful purposes ONLY and that there is no plan or process in place to produce WMD's). If they have good (or the right) intentions, then they will comply, given the opportunity. If they refuse to comply, then GO THROUGH THE SAME PROCESS THAT OCCURED IN THE IRAQI CONFRONTATION. Once there is sufficient support of the world community, then provide IRAN'S REGIME with a final ultimatim (giving them a reasonable amount of time to comply to allow International Inspectors to come in and VERIFY). After all efforts are exhausted to gain their cooperation, and they continue to refuse, T H E N they will have to face the consequences of their OWN ACTIONS AND DECISIONS!
    This process should begin at once before it's too late!

    By taking this approach to the situation, it seems that no one could be accused by the international community of taking "UNJUSTIFIED" pre-emptive action against Iran.

    November 13, 2011 at 2:45 pm | Reply
    • GregP

      el-barredai – the then head of the IAEA did not agree with you. So stop with the bs. I cannot believe we are still discussing the illegal war in Iraq.

      November 13, 2011 at 10:58 pm | Reply
  3. Chris G

    Say goodbye to human rights once China has the most powerful eocnomy in the world.

    November 13, 2011 at 10:28 pm | Reply
    • johnny

      Oh please not this human rights talk again from another American. What good has human rights done for ordinary Americans? Why is there a Occupy Wall Street, and why are there 15% of Americans who are living in total abject poverty?

      Give me the jobs and money, and I wont care about human rights!

      Anmierca, America, please let him who has not sin throw the first stone!

      November 13, 2011 at 10:52 pm | Reply
    • johnny

      For centuries, China was colonised, bullied, and became slaves to various western colonisers, including America. Nobody in America or in the world cried foul, or goodby to human rights, blah blah blah.

      We are fortunate today that Chinese leaders are sensible, level headed people and they what they are good at – trading. Has China so far ever mention the word attack, sanction, human rights to another country. Never!

      You should get out of your frog's well and see the world, like China. Go there and see for youself if human rights is in danger of being smashed , in China. If you do that, I guarantee you will be a much more learned person than you presently are. And, you will not anyhow naively shout "Human rights violations" whenever the word China enters your mind.

      November 13, 2011 at 11:03 pm | Reply
  4. johnny

    I think unlike America which likes to showoff by showering money on any country in order to gain cooperation, China is slightly brainier in the way it conducts money matters. China simply cannot throw away money without being accountable to its struggling citizens in the western and northern states.

    The key word here is accountability by Government leaders to the people.

    Of course I am sure Pres Hu would like to step in help EU states' insolvency problems. But it cant – if there is no profits to make. This make sense to me.

    November 13, 2011 at 10:47 pm | Reply
  5. GregP

    dates seem to be out of sync on this topic

    November 13, 2011 at 11:13 pm | Reply
  6. Ben

    China has already saved the US after all they are their biggest Creditor. What Did the Bilderberg group tell you to write this garbage in hopes of something? I really doubt the Europe wants to be known as the United states of Europe.

    November 14, 2011 at 3:35 am | Reply
  7. Jud


    President Clinton has already said that our private banks have 2Trillion in reserves, and our companies have an additional 2Trillion as well. According to him, we could write up to 20 Trillion in loans and bail out th entire world economy.

    November 14, 2011 at 4:56 am | Reply
  8. Mofuq

    As usual Fareed Zakaria is wrong. The problem is not Italy. The problem is European monetary union without united fiscal policy. Some predicted this as soon as the Euro was created. The "smart people" on the left convince themselves that some marginal idea like monetary union is a good idea, then once it goes to s**t they underestimate the importance of structural factors .

    November 14, 2011 at 10:10 am | Reply
  9. GregP

    Wasnt 100+ years of Hong Kong and Macau not a generous enough gift? Should we bring back the british opium trade as well?

    November 16, 2011 at 1:49 am | Reply
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  11. wgd82

    My take is that this financial crisis is mostly a fault of Western companies agressive transfer of their manufacturing plants from their country to China. The shift of power has started... That not so good thing about it is we invested in a communist country who will always use military actions to force their ideals...

    May 11, 2012 at 6:58 am | Reply
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