Bill Emmott - International Author & Adviser

Article

So the Chinese land easily in a weak and divided Europe
Corriere della Sera - July 3rd 2010

A useful saying, I find, is “be careful what you wish for”. The consequences may not all be what you expected or thought of. In the next few years, this could well be true of two wishes: fiscal austerity in Europe and the decline of the value of the euro. The first is meant to bring business confidence and stability; the second to help European exports. I hope it does both, though without more pro-competition reforms I am not so sure that business will react as positively to the budgetary austerity as European governments are hoping. What these wishes will almost certainly bring more of is China.

            This is not necessarily a bad thing. But it is certainly not the intention. Why will it bring China? Because China has a surplus of capital, a surplus that becomes more valuable and powerful the more that other currencies decline in value against the Chinese yuan. Thanks to the yuan’s fixed rate against the dollar since 2005, and thanks to the euro’s 20% decline in value against the dollar this year, the euro has therefore also been devalued by that amount against the yuan. This will help European exports to China, and reduce the competitiveness in Europe of imports from China. What it will also do is to make Chinese investments in Europe cheaper and more attractive.

            Recently, attention was drawn by a promise of funds from the China Development Bank for wind power in Romania, by investments in port facilities in Greece, and by other investments in Bulgaria. This infusion of Chinese capital is welcome, in a region that needs it and which is potentially very attractive to Chinese companies because of the combination of low labour costs and access to the European single market. What Europeans need to accept is that this is just the beginning. There is likely to be a flood of Chinese money into Europe. And Europe’s own budgetary cutbacks, both at national and at European Union level, mean that European institutions and governments will be unable to compete with this Chinese money for influence.

            The flood will come because China’s currency is very likely to appreciate further in value. Inflation is rising in China and the authorities there need a rising currency as part of the monetary control against that inflation. Last week, in a deft diplomatic move ahead of the Group of 20 summit in Toronto, China announced that its currency was going to be allowed to rise, gently, just as it had been in 2005-08, before the global economic crisis. Initially, the movement was indeed gentle, since the Chinese government does not want to cause domestic controversy by the move, especially among exporters. But given China’s trade surplus and its inflation worries, the rise is likely to continue.

            This is good for the world economy, since the extreme imbalances between surplus countries and those with deficits has been one of the underlying causes of the economic crisis. But, as the Eastern Europe case shows, it will bring not just more Chinese investment, both by banks and by Chinese companies themselves, it may well also bring more political worries in Europe about rising Chinese influence and about increasing competition between member states to try to attract Chinese capital.

            The basic answer should be to accept the money, for more capital and new business vigour has to be part of the solution to Europe’s economic problems. But there could also be a second answer, which is more co-ordination over the issue of negotiating with China, at the European level. China relishes the fact that the 27 member states, and often also regions within them, negotiate separately with China over investments and other business deals. This makes China’s bargaining position stronger. Here is a case where a collective European approach could strengthen our bargaining power, as well as defusing political concerns over excessive Chinese government influence.


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