Wednesday, February 8, 2012

Angela Merkel got extra special red-carpet treatment in China....

Angela Merkel got extra special red-carpet treatment in China....
By Francesco Sisci

BEIJING - If a political Europe is ever to be born, its conception will have been in Beijing last week, during the visit of German Chancellor Angela Merkel. Within a period of about nine months, the gestational period for humans, we shall know if this new polity will be really born or we shall witness a miscarriage or an abortion.

In the Chinese capital, Merkel, in fact, spoke as the head of a European government, not simply as the leader of one EU member state; and indeed China, long fond of the political European Union, treated her as such.

China was interested in how the euro and Europe, perhaps politically united, might be saved. Merkel satisfied these concerns, pledging that the euro will not collapse. She thus implicitly admitted that Germany would step in to avoid gruesome disasters, which could ensue if major economies, like Italy, defaulted on their debts. This possibility is far from remote as some 300 billion euros (US$393 billion) of Italian bonds will be auctioned this year.

The pledge was required by Beijing to guarantee that China will not run away from the European bonds it already holds. In any case, not all Europe is the same. In the whole basket of European bonds, the German ones will be the favorites. This is also for a very practical reason: Germany alone makes up about half the European balance of trade with China.

This fact was reinforced also by German attitude in China. All EU countries speak for themselves and for the EU as a whole in China. Yet naturally Germany, the largest and most important economy in the union, is taken more seriously when doing so. This Chinese perception of Germany's strength in Europe and its interest in Beijing is further reinforced by the fact that the present ambassador of the European Commission in China is German, and he was strongly supported by Merkel.

But if Germany is Europe in China, it must be Europe also at home and in the world. The political union around Germany should be only a matter of time and details. Here, in the details, we know lodges and thrives the devil.

Despite the overall commitment, the present uncertainties in Europe prompt caution in China, where there is no rush to sell US bonds and buy European ones. In fact, notwithstanding its US$3.2 trillion of reserves, China knows it cannot attempt to save Europe. The Old Continent must save itself with a clear commitment and effective action from Europe itself.

Until here, Germany and China appear to have an entente cordiale almost made in heaven. From this point onward, however, the Chinese and European roads diverge.

The Chinese would like to see a major and quicker German effort in Europe, scared that any delay could increase the likelihood of accidents. Berlin has conversely so far preferred to push "delinquent" EU members with brinkmanship, threatening to let them go bust unless they move to reform their failing economies, and thus flaunting the anger of the average thrifty German taxpayers against the profligate southern European brethren like Greece, Portugal, Ireland, Spain and Italy (the infamous PIIGS). That is, Berlin has so far stated its confidence in managing the pace of reforms in Europe without fearing accidents. The problem is: how can one be so sure?

If this is the German stand, China is reluctant to stick too many of its reserves for Europe, even for virtuous Germany. How can China trust countries bundled in Europe, say some of the PIIGS, that Germany, the EU leader, claims to mistrust?

Therefore Chinese do not rule out International Monetary Fund intervention in the eurozone to build a firewall to protect the euro against market speculation. But this firewall should be for the 80-90% made up of European funds.

The statement by Chinese Premier Wen Jiabao last week, at the joint press conference with Merkel, was clear in this sense: "China is considering [ie has not decided on] increasing its stake in resolving the debt crisis through the channels of the European Stability Fund and the ESM", referring to the European Stability Mechanism, due to come into force in July.

According to Chinese economists - who are apparently in agreement with the Americans - the firewall of the euro should be around 1 trillion euros (US$1.3 trillion), about twice what is available today, to create the stability fund. This means that Germany should first increase its commitment in this regard.

In any case, even the Chinese consideration was already a concrete result for Merkel and the euro. After the vague statements indicating China's willingness to back up the euro, the European currency regained value against the dollar and the yen while the interest spread between some major European bonds dropped.

In this case, Merkel's journey to Beijing managed to buy time for eurozone countries to fix their balance sheets, lowered the pressure of rising spreads, and pushed Germany to come out in the open about its intentions to save Europe.

The German commitment in Europe, in any case, is not total or unconditional. There is still the possibility that some countries might exit the euro. So for China, partnering with Germany in Europe is the least risky bet.

In China, there is also great admiration for Germany. Berlin, according to many Chinese, proved its mettle when it was the first of the major developed countries to get out of the 2008 economic crisis.

These elements, then, drive Chinese interest in direct investment in Germany, home to technologies important for the future development of China. For example, its new fast railways are being built with German magnetic levitation technology. This attention is underscored by the fact that Wen in April, in just two months, will go to Germany for the Hannover industrial fair.

This success in China in turn could be a vote of confidence but also a burden for the yet-to-be-born political Europe. Germany is certainly the leader of the future political Europe but it can't be the entire Europe, Germany can't ignore this, as other European countries can't ignore the special role of Germany in China, the second-largest economy in the world.

Therefore the decisions on Europe can't just rest on the shoulders of wise Germany, and Germany should also consider some of the concerns of its profligate brethren, who with their debts helped to boost German coffers. Then they all should decide quickly what kind of Europe they want, otherwise a miscarriage will be almost certain or a deformed child will be born, a disaster for Europe and the Zioconned world....

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