Why BRICs won't bail Europe out?

The idea that Brazil, Russia, India and China will use some of their huge foreign reserves to buy up the bonds of weak euro zone countries has a certain symmetry, but it is unlikely to happen and even more unlikely to work if it does.

Finance Minister Guido Mantega of Brazil confirmed recently that representatives of the four countries, the so-called BRIC nations, will discuss help for Europe when they meet next week in Washington before the International Monetary Fund meeting on September 24. The idea, which is internally consistent at least, is that the exporting BRICs can save themselves pain if they step in where private investors are unwilling to go and help to stave off a monetary union and banking crisis.

While you can bet the BRICs will use this possibility as a bargaining chip, as well they should, this is a crisis of insufficient global demand and too much debt and this particular maneuver will do little or nothing to address those issues.

So far, only Brazil is indicating much enthusiasm for the idea. India was lukewarm, Russia pointed out that its reserves already included more than $250 billion worth of euro-denominated securities and China managed simultaneously to pass the buck and to plead for better trade status.

The BRICs are unlikely to bail out Europe for many of the same reasons that the Europeans seem unable to help themselves: self-interest and domestic political exigencies are trumping cooperation and the hope of a better overall outcome.

China and Russia are, with good reason, very concerned not just with what a euro implosion would do to demand for their exports, but also with the risk that they would see their own treasure wasted in a possibly futile attempt to bolster a system that is unable to take the decisions needed to ensure its own survival.

“We would like to know what actions will the European Union take itself, what scenario will they opt for: a default on Greek debt, default or no default?” Russian President Dmitri A Medvedev’s chief economic advisor Arkady Dvorkovich recently asked, “Whom will they help: banks or governments?” Even though big purchases of peripheral euro zone bonds might buy time for a solution to the essentially political issue of euro zone fiscal management, they could turn Europe from a capital exporter into a capital importer, turning its small trade surplus into a deficit.

“This means slower growth for Europe - Germany needs a trade surplus to generate growth and Spain’s trade deficit is so high that it cannot afford any further deterioration,” according to Peking University professor Michael Pettis. “Is it really a good idea to trade slower growth for another year or two in which Europe can further build up its debt burden?”

This is exactly the point: Europe needs to destroy its debts rather than build them up. This can be done through some form of default or through inflation. More extending and pretending with the help of less well-off nations will not address this, especially as it will serve only to make possible more programs of austerity in Europe. Such programmes will cut growth and make the debts that much more unwieldy.

What remains is for the euro zone to define clearly whom it is going to help, why and how. The best option might be a large recapitalization of banks and a writedown of the debts of the bad borrowers, combined almost certainly with taking a number of banks into public administration.

The problem is that since the euro zone cannot seem to agree to do this collectively, with Germany footing much of the bill, it may end up doing it individually, a process that almost certainly implies that the currency zone will not survive in its current form.