September 27th, 2011 | Global Times China must step carefully in debt-ridden Europe
There has been a lot of discussion on the actions to be taken by China in response to the European crisis, and whether China should step in to bail out the eurozone. Some argue from the humanitarian point of view, some approach it as a strategic convenience, but I see it as more about the timing.
For China, purchasing Italian bonds is not about gaining a strategic foothold in the eurozone, as some suggested, but a matter of how confident we are about our estimation of the future of the eurozone. From a purely financial point of view, the question can be simplified as to whether the investment China is capable of offering involves proper risk expectations and a reasonable rate of return on investment.
At the same time, the question also carries substantial political weight, as sovereign debt and government bonds are closely associated with a country’s overall financial status and geopolitical power.
The decision on what action China should take is a matter of whether China is able to correctly evaluate the financial status of the eurozone as a collective entity. Decisions on purchasing Italian bonds need to be processed not merely on the national level, but to be approached strategically as a regional problem. For China, treating Euro members in different ways could potentially harm the relationship with the eurozone region as a whole.
As a continuation of the world financial crisis, the European sovereign debt crisis will be almost impossible to resolve completely within two or three years, as indicated by the lessons learned in the past recessions. Looking back, the actions taken by the governments in the various countries involved in the crisis, by bailing out of banks so to switch the financial burden onto the public, merely effectively created fake hope for the market. The reoccurring crisis in 2011 indicates the short-term financial strategy taken three years ago was ineffectual and counter-productive.
The expansion of the debt crisis, as I see it, is the result of the actions taken by certain countries that have been abusing the single currency system. Italy is no different, and has been soliciting loans from various sources by pledging its national image and reputation.
It is unlikely the eurozone will soon recover from the crisis, and the possibility of a continent-wide financial meltdown is on the horizon. Though the short-term solutions are limited, a long-term strategy in the financial sector is needed. However, the effect of austerity measures such as tax-rise and cutting down public spending might take a long time to materialize.
Also, since this financial crisis initially started from the US, collaboration between the eurozone and the US on the restructuring of the world financial system, though preferable, will also be a lengthy process.
From a geopolitical perspective, this crisis positioned the EU in an awkward role during the “Arab Spring.” Obliged to get involved in the turmoil of the Arab world, but partially distracted by its own financial problems, the EU lagged a few steps behind where it wished to be. The instability of the Arab world also stands in the way of a lifeline coming from the East, and the EU is concerned about the sustainability of its regional influence.
China for a long time experienced the same problems the EU is facing at the moment, such as debt burdens, a high inflation rate, unemployment, and pressure from the international markets.
But thanks to the fast-growing economy, China managed to absorb the financial instability and moved on. From a humanitarian perspective, China is more than willing to offer help. But in reality, we still need to be cautious about diving into the crisis.
As for a concrete answer on the issue of purchasing Euro bonds, the EU might want to open up communication on issues such as policies on foreign investment and trading tariffs before China re-evaluates the profit margin of the deal.
We understand perfectly that in this era of globalization, regional and national interests are all highly inter-related. China is more than willing to negotiate and partner with the EU in the dealing of the current crisis.
The author is an associate professor at the Academy of International Research of Tsinghua University.
By Zhao Kejin