The deal is both generous and harsh. The EU, together with the International Monetary Fund, has put together a fund of almost h
Whether the European support satisfies markets or whether Greece can abide by these rules remain open questions. What is beyond question, however, is that these circumstances will almost certainly restrain European growth for some time. Not only do they impose severe fiscal restraint on Greece, but other PIIGS have instituted restrictive policies to avoid going down Greece's humiliating route. Even Germany, which by comparison is in much better fiscal shape than these nations, has turned to restraint. Berlin is considering increased tobacco duties, defense cuts, and other spending and tax measures to trim that country's budget deficit from 5% of GDP this year, already one of the lowest in Europe and less than half of America's relative deficit burden, to an effective balance by 2016.
While these policies will surely restrain overall European growth going forward, the effects also will spread around the world. China's economy will no doubt suffer, since the EU is China's largest market. Of course, the Chinese want a modest growth slowdown to cool their real estate boom and so may actually welcome such effects. But the prospect of a long period of adjustment in Europe will weigh on Beijing's longer-term export ambitions.
Circumstances will also affect China's currency policy. The shortfall in Europe will surely make Beijing even more reluctant to bow to American pressure for a yuan appreciation-a conviction that the euro's recent decline against the dollar will heavily reinforce. China, of course, has always shown a reluctance to allow the yuan to appreciate. In all probability, the only reason it allowed the modest yuan appreciation between 2005 and 2008 was because the dollar at the time was falling against the euro. And, whatever little appreciation China allowed against the dollar, it more than made up for in yuan depreciation against the euro.
But now currency matters are going in the opposite direction. The euro's drop against the dollar has also brought it down against the yuan, further eroding China's export prospects in Europe. Since a yuan appreciation against the dollar will only make matters worse for Chinese exports, it seems that no amount of importuning by Tim Geithner, Hillary Clinton or even President Barack Obama seems likely to move Beijing.
It would be a mistake to exaggerate these headwinds for either the Chinese or the American economy. Europe, though important to China, is not that economy's only source of growth. And Europe is not that important a market for the United States, at least compared with what it used to be. What is more, most American sales in Europe occur in more stable consumer staples than in more economically sensitive sectors. The dollar's appreciation against the euro and sterling will, of course, work against American exports, but that headwind still hardly reverses the huge, ten-year dollar depreciation against the euro that will still give American producers greater global price advantages than they have enjoyed for decades.
For America, real growth for this year could come in at about 3%, slow for a recovery but a clear improvement over the past two years. China, even with the weight of Europe's problems, should still approach a double-digit pace of real growth.
Looking toward a more distant future, the Greek situation certainly points toward a centralization of power in the EU. Though those in the Eurozone had already ceded control of their monetary policy to the union, fiscal issues until now had remained ambiguous. The union set guidelines for budget deficits, but when Germany and France found it convenient, they ignored them.
Article 125 of the Lisbon Treaty excused the EU from any liabilities incurred by its member governments, but it was also always apparent that any significant failure by any member, such as Greece, would weaken the union too much for other members to ignore.