Help China Help Europe
The International Monetary Fund has anchored the global financial system for nearly seventy years. But today the Fund faces two serious challenges: the unabating European debt crisis and the discontent of rising powers over IMF governance. Fortunately, these twin crises have a common and perhaps counterintuitive solution: U.S. collaboration with China.
The eurozone crisis is well into its third year, and member nations continue to lurch from near-disaster to near-disaster. The IMF, collaborating with the European Central Bank and European Commission, has helped to prevent an implosion. And recently, in the negotiations over the Cypriot bailout, the Fund has held firm in its views on crisis management. Yet these actions have contained, not confronted, the underlying issues. A comprehensive solution will require funding. Without capital, Europe cannot grow, and without growth, the crisis will continue.
In the past, the money would have come from Washington. The EU and the United States have the world's largest bilateral trade relationship. Weakened demand and the continued depreciation of the euro threaten the fragile U.S. recovery. The U.S. financial system is exposed to possible contagion from Europe. And without the EU, which remains the United States’ strongest ideological partner, the United States will find it far more difficult to support democratic values, prevent nuclear proliferation, combat climate change and demonstrate global leadership. A weakened Europe weakens the United States. Yet today Washington has neither the political will nor economic strength to rescue Europe alone.
The ongoing crisis threatens the IMF, too, and specifically U.S. interests in the Fund. As the Fund has sought capital for the Eurozone crisis, emerging economies have attempted to increase their share of the Fund’s quota and acquire enhanced voting rights. Brazil has repeatedly offered to aid Europe in return for greater influence. China has similarly complained that its current IMF voting share (below 4 percent) is woefully low for the world’s second-largest economy. The recent announcement of the intent to form a BRICS development bank, however improbable in the short term, speaks to the discontent that many of the world’s rising economic powers feel for the existing multilateral system. The pressure for change, which the U.S. has resisted, will only grow stronger.
The United States can alleviate the European debt crisis and maintain its stake in the IMF through a common solution: collaborating with China. The United States should strike a deal with Beijing, offering to facilitate Chinese investment in Europe in return for China accepting the IMF status quo. For both countries, such a deal would bring important gains.
A weakened Europe weakens China almost as much as it weakens the United States. Beijing has been buffeted by reduced European demand and a depreciating euro. China’s $3.2 trillion foreign-exchange reserves represent one of the few sources of global wealth that could significantly alleviate the stress in Europe, and China is rarely shy about putting its money to work. Yet China has had a limited role in responding to the European crisis. Chinese investment is subject to many of the same suspicions in Europe that it is in the United States—fear of local jobs disappearing, sensitivity about foreign ownership, and wariness of Chinese intentions. Even the recent efforts of European states, most notably France, to stimulate Chinese investment have come to little.
The United States could combat these issues by leveraging its strong political ties with Europe to facilitate Chinese investment into the continent. Chinese companies’ unfamiliarity with the legal and political requirements of developed markets—two areas in which the U.S. public and private sectors excel—are significant obstacles to large-scale investment in the Europe. Helping Chinese firms navigate Europe’s regulatory thicket would be a small price to pay for saving Europe.
In return, China would table any push for IMF reform in the short term. Representation at the IMF will surely evolve, but the United States and Europe have no interest in granting concessions now, when both are preoccupied with issues at home. Averting a showdown in the near future would ensure that the IMF remains functional and focused on its role as the global crisis manager and lender of last resort.
The marriage of Chinese and U.S. interests in the eurozone does not imply a marriage of long-term goals. In fact, the ends that motivate U.S. and Chinese intervention are opposed. The United States wants a strong Europe to bolster its own power, while China wants a strong Europe as a check on U.S. power. The United States desires a strong euro to aid American exporters, while China views the euro as a useful monetary hedge against the primacy of the U.S. dollar. Most starkly, the United States sees a strong Europe as a partner in future trade negotiations, the substantive rules of which are explicitly directed at China, whereas China may hope that by aiding Europe it will acquire leverage to resist the trade rules for which the United States and EU are advocating.
Yet long-term conflict should not prevent short-term cooperation. Saving Europe is simply too important to worry about future tensions. As partners in European investment, China and the United States are almost perfect complements, with Beijing providing the capital and Washington navigating and negotiating a European reform package. Collaboration would rescue Europe, preserve U.S. status at the IMF, and serve both United States and Chinese interests.