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The Eurozone Turns Down Chinese Money And Quid Pro Quo
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The Eurozone Turns Down Chinese Money And Quid Pro Quo

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The Eurozone Turns Down Chinese Money And Quid Pro Quo

By Wolf Richter

For months, rumors China would use its $3.2 trillion in foreign exchange reserves to bail out the Eurozone with the stroke of a plastic pen goosed financial markets. But China has a list of demands, a veritable quid pro quo. And today the European panhandling delegation in Beijing, instead of demurely accepting those demands or offering compromises, turned them down. "A slap in the face," according to Reuters.

And the Eurozone goes back to square one. It needs money to increase the firepower of its bailout fund, the EFSF, to €1 trillion. In 2012, a tsunami of debt matures. Alone the four largest countries in the Eurozone need to roll over nearly €1 trillion in debt: Italy €307 billion (19.3% of GDP); Germany €273 billion (10.6% of GDP), France €240 billion (12% of GDP), and Spain €132 billion (12.2% of GDP). Then there’s the tidal wave of new debt that will be issued to fund current deficits and bank bailouts. And the standard fallback solution of having the central bank start up the printing press and buy up sovereign bonds is complicated because the ECB is barred by treaty from doing so—though it’s already doing so.

There were even speculations that Germany was planning to form a mini-Eurozone with a few select members that would follow the same fiscal policies—so powerful had the speculations become that Chancellor Angela Merkel had to step forward and deny them with great emphasis.

Europe’s desperation meets Chinese eagerness. The European Union is China’s largest export market. The 27 countries with a population of over 500 million bought €282 billion in Chinese merchandise in 2010, up 18.9% from 2009. China's export machine depends on a stable Europe to thrive. And financially, China is already stuck. A quarter of its foreign exchange reserves are in euro-denominated investments. If the euro were to take a hit, China would be one of the big losers.

China has already reached into its deep pockets. It invested €10 billion in the Greek shipping industry. While many merchant ships fly the Greek flag, China is a growing force in shipbuilding, and it wants to lock in its customers. In non-Eurozone Hungary, which is struggling with its own debt crisis, telecom equipment maker Huawei is building a logistics center for the European market. And China Railway Construction Corp has agreed to modernize Hungary’s rail network. China has even bought some of the bonds issued by the EFSF, according to its CEO, Klaus Regling.

But China doesn’t want to be the dumb money. October 30, Zhu Guangyao, Vice Finance Minister, suggested that China would wait and see how the technical details of the fund’s proposed special investment vehicles would work out. This followed a warning by the government-owned news agency, Xinhua: China would be willing to invest in Europe on a win-win basis; the Europeans should not expect a Good Samaritan but be prepared to make concessions.

Which China has floated for months:

- EU support in obtaining market-economy status at the World Trade Organization.

- Removal of the arms embargo that the EU imposed after the 1989 Tiananmen Square massacre.

- Better guarantees for its investments.

- Greater influence at the International Monetary Fund, specifically through inclusion of the yuan in the IMF’s currency basket that underlies the Special Drawing Rights (SDR).

Alas, making concessions to China is the one thing that Germany and some other less desperate European countries aren’t prepared to do. Not yet.

"We're making a huge mistake if we stabilize the euro by permitting influence from an external government," said Hans-Peter Keitel, President of the Federation of German Industry (Handelsblatt). Germany, which has already surrendered its spot as the world’s number one exporter, is in no mood to cede more ground to China. And it’s fiercely resisting the temptation to offer political concessions in exchange for money. He added, “For example, we can't offer China compromises concerning intellectual property just to save the EFSF."

Resistance also came from other directions, as Germans shudder at the idea of becoming too dependent on money from the communist regime.

"It’s worrisome if a country that isn't a democracy obtains influence over EU members,” warned Peter Bofinger, a German economist and member of the German Council of Economic Experts. And Amnesty International fears that human rights will be moved to the back burner. Which, of course, they will be.

And so the delegation had gone to China empty handed. China’s demand for greater influence at the IMF and accelerated inclusion of the yuan in the SDR, which the Chinese apparently had seen as a feasible compromise, hit a wall of resistance (Reuters).

Clearly, the debt crisis isn’t deep enough yet for concessions. However, a vertigo-inducing spike in French yields or a 2,000 point drop in the DAX might change that, now that governments decide every issue with one eye on the ticker. Then Germans will be confronted with the choice of yielding to Chinese money, allowing the ECB to print unlimited amounts of money (and devalue the Euro), or invent another option, such as the mini-Eurozone that Merkel so vigorously denied or the revival of the deutschmark.

Export powerhouse Germany finds itself at war—with itself.... Germany at Its Rubicon.

Wolf Richter

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