Riding to the euro's rescue

ARE THINGS looking up at last for Europe and its troubled single currency? Politicians are making encouraging noises about a larger, more flexible German-backed bailout fund that may soon be put in place. This, along with coordinated, pro-growth, structural reforms across the continent, should help restore investor confidence and prevent a collapse of the euro, the optimists say. As if to confirm the notion that Europe's contentious politicians are finally getting their arms around the crisis, one of the continent's wobbliest financial dominoes, Portugal, managed to sell more than a billion euros' worth of its long-term debt at lower than expected interest rates.

It never hurts to look on the bright side. Still, strange things are happening in Europe - none stranger than the emergence of China as the continent's sugar daddy. The world's largest private-sector bond fund, Pacific Investment Management Co., has bowed out of the market for sovereign debt of Portugal, Greece, Ireland, Italy and Spain. Beijing, however, is reportedly planning to buy at least $7.8 billion worth of Spain's paper and appears to have been a major player in Portugal's latest bond sale. Not to be outdone, Japan is also riding to the euro's rescue with a plan to help fund Ireland's bailout.

Obviously, China and Japan - despite their massive foreign currency reserves - do not have the means to prop up Europe all on their own. But, dependent on export sales to that continent, they are trying to help buy a bit more time for Europe to arrange a soft landing for the euro. Maybe it will work out. Nevertheless, it's worth pondering the contradictions of this situation. One is that democratic Europe, like the democratic United States, is becoming more financially dependent on authoritarian China. Beijing may seek an end to the European Union's embargo on arms sales, which was imposed after the 1989 Tiananmen Square massacre.

And these short-term gambits are in tension with the long-term interests of both the global economy, which needs a less export-dependent China, and China itself - which faces inflation in part on account of its undervalued currency. Japan's export-led model, too, is played out, so much so that its own debt is almost 200 percent of gross domestic product. Yet rather than invest its vast foreign currency reserves in internal restructuring, Japan deploys them to protect its share of the European export market. The risk is that rather than enabling the breaking of Europe's old habits - among them, Germany's addiction to export-led growth - the Asian giants will facilitate their perpetuation. Meanwhile, both Europe and Asia hope that recent U.S. tax cuts help resuscitate the American consumer's appetite for foreign products, even though the Federal Reserve's quantitative easing cheapens the dollar and boosts U.S. exports.

Asia and Europe have been producing more than they consumed while the United States has been consuming more than it has produced for so many years that change was bound to be hard, even after the old patterns became unsustainable. But change must come sooner rather than later, because global imbalances are huge. Indeed, according to analysts at J.P. Morgan Private Bank, the world has never relied more on countries with surpluses financing nations with deficits, or on the public sector in some countries to support the private sector, than it does today. The extent of these combined imbalances, as a share of global GDP, is the highest in 30 years. That can't, and won't, go on forever.