Has the EU escaped a Chinese rescue?

There is one worrying element to Greece's financial tragedy that people seem to have forgotten: Greece first turned to Beijing for help

ECFR Alumni · Director, Asia and China Programme
Senior Policy Fellow




It looks like Greece
will be alright. After years of denial and budget blow-outs that left the
country’s public finance in a dire mess, it was announced after the summit of
EU leaders on 11 February that – in one way or another – the eurozone will
support Greece in getting its economy back on track. There is some
disappointment surrounding the failure to come up with a solid rescue plan for Greece
after German resistance to a swift bail-out. But, all in all, the eurozone is
sticking by its most troubled member.

Europeans asking each other for help and getting it (albeit in undefined
terms) looks like good news for the European
Union. But there is one worrying element to this Greek tragedy that people
seem to have forgotten: Greece
went to China
first.

In late January, Greece,
through the good services of Goldman
Sachs, offered China
€25 billion of its public bonds.

We know we are living through a power shift from West to East. We also know
that Europe has difficulty coping with
pressing global issues. But this opening by Greece
to China highlights a few
more disturbing trends for Europe.

The first is obvious: Greece
is in a very fragile position, and this proposed deal showed how desperate the
nation’s politicians are to get out of it. The fact that the whole affair
became public before the actual conclusion of any deal not only weakened
Greece’s bargaining hand, but also showed just how little control the Greeks
have on sensitive financial information.

Secondly, Greece
had decided to make its bid for a Chinese rescue alone. Not only did this
weaken its own hand, but it also decreased Europe’s financial leverage
vis-à-vis China.
It seems the deal was proposed without co-ordination at the EU level, and
perhaps as an alternative to a Greek appeal to the eurozone. The fact that the
attempt was led by Goldman Sachs, and not by a European bank, supports this
idea.

But there was a more alarming side to this story. Yes, Greece will (probably) not have to
rely on the Chinese now that the eurozone has pledged its (undefined) support.
And if the eurozone fails to pull through, Greece could always call the International
Monetary Fund. But if China
accepted the Greek offer, what leverage would China
gain over Europe? China’s investment funds cannot be
seen to be so willing to pour money into failing public budgets unless there is
a very good reason to do so. True, China
has lent huge amounts of money to Russia,
Brazil
and western African nations. But these were trade-offs for equally huge natural
resource deals. Unless we count the craftiness of Ulysses’ scions as a natural
resource, Greece
does not have much to barter with.

Save for one contribution the Greeks could offer the Chinese: the
opportunity to leverage the foreign policy of the European Union.

Greece’s positive
attitude to China
cannot be worth €25bn on its own. Yet when each of the 27 member states has
veto power over many of the EU’s foreign policy decisions, forging a tight
Greek connection is certainly worth something. China
can already count on Cyprus
as its best friend in Europe, thanks to
support at the UN.
And what about Spain, the
other likely candidate within the eurozone for a budget emergency, and which
has just loudly proclaimed it wanted the EU arms embargo against China
lifted in the next few months?

All this leads to one conclusion: the EU should have its own public bond
issue. It could then seek investment from China and other surplus countries.
Europe’s market for bail-out capital, particularly at the periphery of its
borders, and its need for large new investments in infrastructures (transport,
energy distribution and alternative energy), suggest that capital investment
from China would be a useful
quid pro quo for China’s
huge trade surplus with Europe.

Europe would have little reason to worry: since the money would be spent
quickly, it would not lead to a rise of the euro any more than China’s
purchase of US
Treasury bonds caused a rise in the dollar. These public bonds – launched
at the level of the European Union, not by a single member state – would imply
budgetary oversight and measured economic decisions at the European level, not
run-away speculation of the sub-prime variety or the kind of vicious fiscal
circle Greece
has put itself in.

Common and co-ordinated progress to create a European public bond market,
after the remarkable performance of the European
Central Bank in September-October 2008, would signal a strong Europe that has innovative financial instruments beyond
the common currency. At the height of the financial crisis in September 2008,
Jean-Claude Trichet, the president of the European Central Bank (ECB),
exclaimed that there were limits to what the ECB could achieve for lack of
conventional budget and debt instruments. A Europe
where the weaker members of the eurozone run first to powerful outside
creditors for help only demonstrates the ECB’s weakness.

In this new global era, foreign policy and financial leverage (and the lack
of both) are closely linked. It is of urgent necessity that Europe learns the
lessons from the Greek misstep and acquires a common stance towards China
on the financial front. That stand need not be adverse: it just needs to be
common. We would not want our common foreign policy and security, somewhat
empowered by the post-Lisbon institutions, to fall hostage to misguided and
desperate financial decisions by one or two weak member states.

This piece was first published by European Voice

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.

Author

ECFR Alumni · Director, Asia and China Programme
Senior Policy Fellow

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