Pallavi Aiyar: Twist in the Euro tale

“There is a profound crisis of Europe as a role model,” Jonathan Holslag, senior researcher at the Brussels Institute of Contemporary China Studies said. On a recent trip he made to Beijing, European leaders were referred to with contempt by Chinese officials with French President Nicolas Sarkozy referred to as “a naked little emperor” and European Commission President Jose Manuel Barroso called “as unconvincing as a rag vendor”.

A strong and stable euro is clearly in China’s interests. The EU is China’s largest trading partner with over 20 per cent of China’s exports (worth $383 billion in 2010) going to Europe. Moreover, Beijing has made substantial investments in the euro as part of its attempts to diversify away from the dollar. Some 25 per cent of China’s mountainous $3.2 trillion of foreign-exchange reserves are thought to be in euro.

It’s not surprising, therefore, that throughout the crisis Beijing has been making the right noises about supporting the euro. When European leaders announced their intention of setting up a special investment vehicle through which to court outside funds, notably from China, Beijing took the request seriously.

Sarkozy was on the phone to Hu Jintao even before the ink on the October-26th agreement was dry. And the chief executive of the euro zone’s bailout fund, Klaus Regling, was on a flight to China, begging bowl extended, the very next day. Beijing’s response was non-committal but encouraging, with rumours of a euro 100 billion investment to be announced at the G20 summit in Cannes flying thick and fast.

Greek Prime Minister George Papandreou’s shock call for a referendum and all the political yo-yoing that ensued, scuppered any imminent investment plans the Chinese might have had. And the contortions of Greek and Italian politicians have also left China in no doubt about the perils of democracy.

“If a small country like Greece with an economy that only accounts for three per cent of the EU’s economy can derail the whole union…it says a lot about the deficiency of the EU’s political and economic integration,” analyst Xia Wenhui said in a commentary in Xinhua.

The lack of control over events that Europe’s leaders have displayed epitomises the kind of nightmare scenario that is the stated aim of the Chinese authorities to avoid at all costs.

China’s star may be on the ascent but the country faces pressures and contradictions that can make governing Europe feel about as onerous as choosing between waffles and cake for afternoon tea. Chinese leaders have to battle eye-watering inflation, catastrophic environmental degradation, a yawning rich-poor divide and major health epidemics every day. To them, the inability of Europe’s authorities to make their school teachers retire at 62 or government employees forgo a 13th month’s pay every year is proof, if it was ever required, of the dangers of walking down the western-liberal path so often urged upon them.

The idea of China bailing out Europe has provoked a strong popular reaction within the country. Internet chatrooms are abuzz with criticisms of the idea. Why, many Chinese are asking, should a country with less than a third of the per capita income of Europe, be expected to shell out cash when economically-powerful countries of the euro zone club like Germany remain recalcitrant. It’s a fair question. Berlin has been publically-chary of ploughing in the German taxpayer’s hard-earned money to save “profligate, lying” Greeks.

The result is a northern European “core” that is seeking to proselytise others into having the faith that it lacks itself. Given the circumstances, its unlikely that China will turn believer and start handing out its foreign exchange reserves to Greeks, Italians or whichever Europeans need it next in the absence of ironclad guarantees on their investment. But by openly turning to China for salvation, Europe has accelerated the process by which its own clout is declining relative to Beijing’s.

By transforming China’s image from that of an irresponsible currency manipulator, a technology-thief and a human rights violator to the potential saviour of western governments and the entire European financial system, Europe has definitively altered the terms on which it will be able to deal with Beijing going ahead.