Realizing the benefits of China-EU strategic cooperation
This article was originally published in China.org.cn. It is being republished here with the kind permission of the author.
Discussions between China and the European Union (EU) have speeded up during 2011. To take just the most recent events, the second China-EU Strategic Dialogue was held in Hungary on May 12-15. European Council President Van Rompuy visited China a day later and met President Hu Jintao.
It is easy to see why such exchanges have increased. There are potentially strong benefits for both sides. However some in the EU appear to be asking China to ignore a realistic assessment of risk. This cannot work. Mutual benefits must be based on sober estimates.
It is well known that some of the small EU countries have severe debt problems. These are centred on what the financial community has now ungraciously labelled the “PIGS” economies - Portugal, Italy, Greece and Spain. Simultaneously a second group of EU countries, centred on Germany and France, have recovered from the international financial crisis and are growing fast.
Germany’s GDP has recovered to its level prior to the international financial crisis and in the first quarter of 2011 was growing at an extremely fast annualized rate of 6.0 percent. France’s economy was growing at an annualized 4.0 percent.
Given that the most troubled European economies - Greece, Ireland and Portugal - are small, then if the whole of the EU were growing as fast as Germany and France there would not be any significant economic risks in Europe.
The problem is that there is a third group of large EU economies that are not growing significantly - the UK, Italy and Spain. In the first quarter of 2011, Spain’s annualized growth was only 1.2 percent, Italy’s was 0.4 percent, and the UK economy has not grown at all in the last half year. It is this “stagnant middle” of the UK, Italy and Spain that is holding down the EU’s overall growth rate. The EU’s economy in the first quarter of 2011 was still 2.1 percent below its peak output recorded more than three years earlier prior to the financial crisis.
This slow rate of EU recovery interrelates with the realistic assessment of risks the Chinese authorities must make in their relations with the EU. Hu Jintao, at his meeting with Herman Van Rompuy, stressed the importance of trade and investment. On this considerable progress is reflected in the fact that the EU is China’s largest trade partner and China is the EU’s second largest trade partner.
China’s relations with key European economies are even more advanced. For example, Germany and China’s economies are highly complementary. Germany is one of the world’s most important producers of high quality machinery and equipment. This totally fits with China’s aim of upgrading its manufacturing industry - a process that will take many years. China overtook the US this year in terms of the value of Germany’s exports.
Potential for expanding such trade is even greater. Hu Jintao at his meeting with Herman Van Rompuy stressed that: “The EU should take proactive measures to expand export of high-tech products to China.” There are few downside risks in trade and investment carried on by companies.
However the EU is asking China to engage in activity which does carry definite financial risk. It is this the Chinese authorities have to assess realistically. With EU encouragement, China has been buying bonds in Spain, Greece, Portugal and some of the other European countries which face risk on their sovereign debt.
At least some “restructuring” of this European country debt is realistically inevitable - “restructuring” being a polite term for the harsh financial reality that the borrowers will not meet the terms which they originally agreed with lenders.
Take Greece. Its debt is rising towards 160 percent of GDP. Its interest rate to borrow money on private markets is 16 percent - meaning in practice Greece is excluded from private finance. The EU already agreed a $156 billion bailout for Greece and this has been insufficient to stabilize the situation. Greece is most unlikely to be able to repay its debts on the originally agreed terms. Astronomical interest rates are the markets estimate of how much the value of Greek debt will be marked down by - in reality an interest rate plus a calculation of by how much the debt will be devalued.
Whether China wishes to participate in debt auctions which carry risk is an important decision. As part of an overall agreement China could decide to take the risk on some parts of European debt - because it might judge that the overall benefits of an agreement would be greater than individual losses on debt. In judging whether an agreement is “win-win” what has to be considered is its overall framework - it is unrealistic to insist there has to be a “win” on every single part of the agreement. But what is completely unreasonable is for China to be asked to enter into a “win-lose” agreement - that is where the EU wins and China loses.
The EU maintains a series of policies which are unreasonable. An example is not accepting China’s economy having market status - something even the US is reconsidering. At the China-EU strategic dialogue there were nice words from the EU side - Catherine Ashton, EU foreign policy chief, declared that “the EU-China relationship should be an example of international cooperation”. But there was no movement on the key issues for China.
In short, for some in the EU, China is to be asked to put its money into risky European financial instruments without any serious agreement that will bring benefits to China. That is not an approach any country would accept.
There are big potential mutual benefits for both the EU and China in their relations. But to realize them the EU needs a realistic position.
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