What Europe needs is an EIIB, not an AIIB

If Europe’s actions are watched from heaven, they must indeed bring some puzzlement. Here is a continent that is engaged in a prolonged drive to balance its public budgets, and is therefore starved for major investments – such as the infrastructure (transport, energy, telecommunication, alternative energy) needed to achieve better European integration and security. Here is a continent where the deficit-ridden member states have undertaken sales of public assets –although Greece is the glaring example, it is far from being the only one – including to Middle East and Asian sovereign investors. Here is a continent that is advocating (and to some extent, creating for itself) financial and fiscal transparency, with all the risks of seeing capital flows diverted to less demanding host countries.

Yet it is the same continent where a stampede suddenly starts to participate in the financing of Asia’s continued growth, by joining the Asian Infrastructure Investment Bank sponsored by China. This despite the fact that Asia has piled up excess currency reserves ever since 1998 (and China is not alone in doing this), and enjoys a growth rate that puts European economies to shame. And Europe’s move is largely on China’s terms for international loans. Although there is no reason to blame China for doing today what others did a few decades ago, the fact is that Chinese financing and aid is both opaque in its terms and very clear in its intent. It is generally tied to markets for Chinese firms – much as Japanese or Korean aid and finance used to be tied to their own firms.

Only 20 years ago, when Europe responded to an initiative by Singapore to create ASEM (the Asia-Europe Meeting) it included as one of its pillars a forum for financing infrastructure projects in Asia – on Europe’s terms. The initiative petered out after a few years, at a time when Asia was short of cash after the 1998 Asian financial crisis.

Fast forward to today. The issue of project bonds for the European Union, and of a European infrastructure fund, now renamed the Juncker fund, has taken years to overcome internal opposition. The Juncker fund remains at a minimal size compared to the European economy. Meanwhile, European member states taking their cue from David Cameron – for once a European pioneer! – rush to bring the promise of financing to Asia. And this, not on the demanding rules that prevail inside the European Union (and that probably hinder investment), but on unknown future rules of an organization whose principal partner is China. For better or worse, China has done for itself, and for the countries that are friendly enough to merit its largesse, exactly what Europeans cannot or will not do for themselves: long-term financing of major public projects whose return is questionable and even hazardous. Indeed, ground-breaking projects have often been financial sinkholes: think of Panama, or even Eurotunnel, whose construction was achieved with a nearly total loss for the initial investors, if not for the millions of travellers who now use it. Because China’s economic structure produces giant and poorly managed surpluses, it excels at this sort of risky and open-ended gambits.

David Cameron has re-enacted with China and Asia an old English proverb: “bringing coal to Newcastle”(e.g. to what used to be England’s largest coal producing region). This makes perfect sense for the United Kingdom as opposed to Europe: first, the UK has no money to speak of for its own infrastructure investment – David Cameron is not talking here about money he does not have, but about the potential political benefit of courting China by breaking ranks with others and being the first to do so. Second, the City – and associated offshore locations – are largely deterritorialised, so that they may very well harbour investors from elsewhere who are willing to put money into Asian infrastructure on Chinese terms: in fact, Chinese investors (including from Hong Kong) might be among them.  It perfectly befits the City’s role as an intermediary, collecting traffic fees without too much checking of the license plates. And it is very clear that David Cameron has no interest in strengthening Eurozone financing or European bargaining power in public markets. His sudden advocacy in early 2014 of an unconditional free trade agreement with China, while the European Union is trying to get China to sit down and negotiate smaller but more concrete commitments, was very telling. There is probably not a European interest that he would not sell against a potential windfall for the United Kingdom.

Last year, David Cameron looked isolated, and a little foolish – as the Chinese brought no gift in return for his gesture. This year, he is about to look like a genius. For the biggest Eurozone partners – France, Germany, Italy – have raced to follow suit within 72 hours. They certainly will not win any brownie points with the Chinese, who may instead feel that the London financial market deserves a nod if it helps them build their regional sphere of influence against Western – or Japanese – interests.

The move by Eurozone countries probably stems from traditional business considerations, as opposed to Cameron’s political and financial gambit. If the AIIB takes off, their firms should be on to some of the deals that will be made. It does not hurt to be among the founders. Let’s simply hope, in today’s climate where abundant monetary liquidity returns to Europe, that they don’t bring too much capital. It has already happened once – between 1993 and 1997 – that hapless European bankers, at a time of low growth and profitability in Europe, joined another Asian gold rush by becoming major lenders, and were among the first losers when the Asian financial crisis broke.

Today, stringent anti-growth rules for public budgets in Europe mean that many useful infrastructure projects (starting with new British rail lines!) cannot be financed. Europe’s lack of ambition, and the impact this has on the job opportunities of its young people, is creating a political backlash across the continent. Just try explaining to European voters that the money our governments and banks will not put up for European projects is about to go to Asia to support Chinese projects and companies. You will indeed create more contempt for Europe.

A much more worthy undertaking would have been to expand the Juncker fund into a European Infrastructure Investment Bank – in other words, an EIIB with external participants and funders. This would include China, which has a structural current account surplus, and might consider European norms if they come along with low geopolitical risk and predictable rates of return. But Europeans seem totally unable to agree among themselves, and only able to compete against one another and to divide themselves in front of external parties. The lack of ambition for Europe, and the unseemly race that says it all about the lack of trust among key member states when it comes to economic interest, are indeed a sorry sight.