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By Root 850 0

for the United States. A strong euro keeps up the European appetite for U.S. machines, aircraft, pharmaceuticals, software, agricultural produce, education and the variety of goods and services the United States has to offer. A collapse of the euro would mean a collapse in trade between the two giants of global output. A collapse of a European sovereign could take down the European banks and the euro with it, as investors instantaneously developed a revulsion for all debt denominated in euros and fled from European banks. The consequences of a European sovereign debt default for U.S. exporters to Europe would be too great; here was an entire continent that was too big too fail. The U.S. bailouts, swap lines and support for issuers like Fannie Mae were all part of a multifaceted, multiyear effort to prop up the value of the euro.

China also had an interest in propping up the euro, but its efforts came with a political agenda. Europe is a huge export market for China as well as the United States, and to that extent China’s interests are the same as the United States. But China’s banks are not nearly as entwined with Europe’s as are America’s, which gives China more degrees of freedom in terms of deciding how and when to help. The European sovereign debt crisis offered China the chance to diversify its reserves and investment portfolios away from dollars and toward euros, to acquire leading-edge technology systems that had been denied it by the United States and to develop platforms from which it could engage in large-scale technology transfer back to China.

Germany welcomed the U.S. and Chinese support for the euro. As an export powerhouse, Germany might have been expected to favor a weak euro for the same reason that the United States favors a weak dollar and China favors a weak yuan: to gain an edge in the currency wars with a cheap currency that promotes exports. Germany, however, was not only an external exporter; it was an internal exporter within the European Union. For those eurozone exports, there was no currency consideration since both the exporter and the importer, for instance Germany and Spain, used the euro. If the euro were to collapse or members broke away from the euro and reverted to their old currencies at devalued levels, those markets might be lost.

Conventional wisdom had it that Germany anguished over support for Greece and Ireland and the other weak links in the euro chain. In fact, Germany had no attractive alternatives. The costs of a euro collapse far outweighed the costs of regional bailouts. Germany actually benefitted from the European sovereign debt crisis. The continued existence of the euro gave Germany a dominant position inside Europe while a somewhat weaker euro internationally enabled it to gain market share in the rest of the world. The sweet spot for Germany was a euro that was weak enough to help exports to the United States and China but not so weak as to collapse. Germany was successful in finding that sweet spot during 2010 despite the sturm und drang surrounding the euro itself.

With the self-interests of the United States, China and Germany all pointing in the same direction, there would be no doubt for now about the survival of the euro. That the banks were flush with rotten assets, that the periphery nations were running nonsustainable fiscal policies and that the people of Greece, Ireland, Portugal and Spain were facing austerity in order to keep the assembly lines moving in Seattle and Shanghai were all matters that could wait for another day. For now, the center held.

The Eurasian Theater

If the relationship between the euro and the dollar can be described as codependent, the relationship between the euro and the yuan is simply dependent. China is fast emerging as a potential savior of certain peripheral European economies such as Greece, Portugal and Spain based on Chinese willingness to buy some of their sovereign bonds in the midst of the European sovereign debt crisis. However, Chinese intentions toward Europe and the euro are based on self-interest and cold