Courtesy of Mish.
Michael Pettis at China Financial Markets believes optimism regarding China and Europe is unwarranted.
Via email, he states the case while giving nine key things to watch in 2013.
The subtitles below are mine, the rest from Pettis.
Too Early to be Enthusiastic About China
I wanted to send out this newsletter last week, but the air in Beijing has been so foul that it has been hard to generate the necessary enthusiasm to write it. Over the weekend I was finally able to finish it, perhaps because I have finally gotten used to breathing solid chunks of grit.
Away from the horrible air pollution the year seems to have begun with an optimism that I think is going to prove hard to justify.
Many countries before China have managed one or more decades of miraculous growth, and in every case, perhaps not surprisingly, they developed significant domestic imbalances that were only subsequently resolved during difficult adjustment periods.
Very few, however, have managed the subsequent adjustment process in such a way that their early economic promises were fulfilled. Beijing must now manage China’s own adjustment, and this adjustment must come soon if we are not to run into a serious debt problem. How Beijing does so is key to China’s longer-term economic success, and it is much too early in the process to get overly enthusiastic. Certainly last year gives a taste of what we might expect.
The next year or two are also going to be very important in determining the success of the great European experiment and, even more, the viability of the euro as it currently exists. At this point, unless the peripheral countries unite in their demands and force changes in growth policies, the future of the euro lies largely in German hands. If Germany decides to save the euro by expanding its economy sufficiently to allow the peripheral European countries to grow while cutting their debt levels, the euro can be saved. If not, I don’t really see how peripheral Europe can manage many more years of grinding away at debt through high unemployment (which anyway doesn’t seem to improve debt ratios).
Burst of Optimism for Europe
We ended 2012 in a burst of optimism for Europe, with everyone cheering Mario Draghi for having “saved” the euro, but I am deeply skeptical. As far as I can tell nothing substantial has changed, and if countries like Spain are a little more able today to roll over their debts than they had been during the summer, so what?
If Europe were merely suffering from a liquidity problem (or a problem of “confidence”, as politicians and bankers always like to say before the big debt crisis), then the ECB’s willingness to fund all this debt would be a step in the right direction. But if the problem is too much debt, too high unemployment, and misaligned currencies, then rolling over the debt means that the ultimate resolution will be more painful simply because there will ultimately be more debt to write down.
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