The EU Plays the China Card

Who could have imagined back in 2002, when the euro first began circulating, that ten years later, in an act of near desperation, German Chancellor Angela Merkel, would travel to Beijing, hat in hand, to seek bailout funds from Chinese Prime Minister Wen Jiabao to keep the euro afloat?  But that is exactly what happened on February 2nd.  In addition, to placate her American handlers, she also delivered a plea to the Chinese to support tough UN Security Council sponsored sanctions against Iran, truly an exercise in futility.

The common currency of the 17-nation eurozone is being kept afloat by a series of lies, leaks, rumors, and smoke-and-mirrors, behind the scenes financial schemes.  Equity markets are pumped up by the expectations of the next meeting of the ECB, the European finance ministers, or German Chancellor Angela Merkel with French President Nicholas Sarkozy.  Each such meeting holds out the hope of a silver bullet fix for the euro.  Most have fixed nothing.

China has $3.2 trillion in foreign exchange reserves of which over $1.0 trillion is invested in U.S. Treasury bonds.  Merkel would like to persuade Wen Jiabao to use some of China’s excess foreign exchange reserves to bail out financially beleaguered EU countries such as Greece, Italy, Portugal, Spain, and possibly others.  All of this makes Washington very nervous. Although the White House wants to see the euro stay afloat, it is neither politically nor financially in a position to do much about it.  On the other hand, it does not relish the thought of the EU becoming financially dependent on Beijing or China reducing its commitment to holding U.S. government debt.

To make the Chinese bailout of the EU more palatable to the United States Merkel was no doubt pressured into playing the Iranian card calling for tough sanctions against Iran, if it does not abandon its alleged plans to develop nuclear weapons.  However, it’s hard to imagine that either China or Germany would be very enthusiastic about such sanctions since both China and many EU countries import oil from Iran.  Furthermore, China and Germany are known to be suppliers of technology to Iran.  On the geopolitical front China may actually welcome a nuclear armed Iran as a countervailing force to American-Israeli hegemony in the Middle East.

It’s not by chance alone that China and Russia vetoed a UN Security Council Resolution condemning the Syrian government’s bloody response to the regime’s opposition movement.  They see Western intervention in Syria as one step removed from an American led effort to bring down the government of Iran.  Both acts would be viewed as serious threats to Chinese and Russian national security.  China knows that the NATO led overthrow of Libyan leader Muammar Qadhafi was aimed squarely at curbing Chinese influence in Africa, since China was visibly involved in Libyan oil production before the attacks.

The EU may soon find itself in such desperate need of Chinese financial support that China might demand that both Israel and the U.S. discontinue their threats against Iran as a condition for granting the EU financial support.  China could effectively checkmate both Israel and the United States.  On the other hand, if either Israel or the United States or both attack Iran’s nuclear sites, China and Russia might retaliate by taking out Israel, closing the Strait of Hormuz, or attacking the oil production facilities in Saudi Arabia, Kuwait, or Iraq.

Notwithstanding the fact that Merkel’s visit to China barely made it on the national radar screen, the consequences of her visit could have broad based, far reaching implications.  Any decision taken by Beijing will affect all 28 EU countries, China, Russia, Iran, Israel, the Arab nations, the U.S., and probably most of the rest of the world.  The fate of the euro and the fate of Iran are enmeshed in a very complex nonzero-sum, multicountry chess game of our own making.  Sometimes in the process of our perverted attempts to unify and secure ourselves through coercion, collectivism, and the military, “we end up destroying community, scattering ourselves, fracturing into a thousand different voices, falling to earth in disaster.  Meltdown.”  So said William H. Willimon, former Dean of the Duke University Chapel, in Downsizing the USA (1997).

Sometimes, when we make our bed, we actually have to lie in it.  This may be one of those times.

Thomas H. Naylor is Founder of the Second Vermont Republic and Professor Emeritus of Economics at Duke University; co-author of AffluenzaDownsizing the U.S.A., and The Search for Meaning.