China Set to Bail Out The EU


Not long after the leaders of the European Union unveiled their new plan to save the euro zone from collapsing under the weight of its financial woes, top European leaders began a dialogue with Beijing to discuss the possibility of getting a loan from China. Does this seem prudent? The answer lies in the fact that there are no alternatives when it comes to getting a loan. The implications are dire, as China seems poised to expand its influence in Europe.

Though it’s not surprising that the EU would engage in high-level talks with China, it is rather surprising that Klaus Regling, the chief EU official heading the European Financial Stability Facility (EFSF), would be so quick to gravitate to China for assistance. The same goes for French President Nicolas Sarkozy, who got on the phone with Beijing to ask for China’s help in solving Europe’s financial mess.

The reason for surprise here is that the recently unveiled plan to solve the debt crisis was just released. To immediately ask for help from a state that the EU wants to encourage improvements on human and political freedoms in seems to be an act of no confidence in the current plan.

A number of factors should be taken into account when considering the prudence of Europe’s courtship with Beijing.

First, China is likely to make its aid conditional on Europe lifting existing trade barriers that prevent cheap Chinese goods from flowing into the European market. These barriers might already be in the process of being overturned as a result of a recent decision from the WTO, which largely sided with China on a complaint regarding the EU’s import duties on Chinese shoes. This finding may lead to changes on import duties on Chinese shoes and other similar goods – which the retail-heavy West has wanted since the duties were imposed in 2006. Hence the bite may not be bad for Europe.

Second, Regling did not comment on the details of his talks with Beijing, but he did state that he “expected to submit a proposal on how to scale up the 440 billion euro ($623.7 billion) EFSF rescue fund by November.” This goes to show how much Europe’s debt could stand to increase Chinese assistance.

Third, Europe has few alternatives to China to resolve its financial woes. Brazil is another candidate for securing funds, but doesn’t have the confidence in the new plan to assist Europe, as indicated by its Finance Minister, Guido Mantega, who told the press that “I believe that European countries do not need funds from Brazil to buy bonds. Brazil is not considering it. They have to find solutions to the European problems within Europe.” The Economist reported that Brazil is having its own problems reining in inflation and other weaknesses in its economy, so Brazil’s rejection may not be a matter of confidence after all.

The IMF is also currently working on a Special Purpose Investment Vechicle (SPIV) – with the backing of Brazil – to help the EU out of its predicament. There is a holdup as the U.S., Japan, and Germany has stated they believe the current $380B IMF fund is sufficient. India and Russia are waiting to see if China chips in before pushing new IMF funding to Europe.

Lastly, it seems like the Chinese and European interests are aligned in making this deal possible as the China Daily has indicated China’s willingness to get involved with “global governance,” not to mention China’s interest in the financial stability of the European economy. China also has the financial muscle to help as it has accumulated a whopping $3.2 trillion in foreign currency reserves. The impediment is, as indicated earlier, a question of market access, which hinges on the EU’s recognition of China as a market economy.

As the saying goes, it’s a choice between a rock and a hard place. Europe has no choices but to borrow from China. Though it may seem somewhat anticlimactic, Europe doesn’t have much of a choice in who it gets its loans from. It’s a sad and simple truth unless there is a sudden turnaround in Europe’s economic fortunes in the next year or so.

Photo Credit: Wikimedia Commons