What Does Europe’s Current Economic Plight Mean for China （Qiu Yuanlun）

The ongoing economic crisis that landed Europe in plight has definitely an impact on China in the following ten aspects, half of which are positive with the other half negative:

First of all comes the negative ones:

First, the current European economic crisis has not only increased the volatility and uncertainty of the world economy but also dragged down the growth rate of global economy and generated a dampening effect on the employment. The problems would become even more acute if we look at the following figures: the aggregate GDP value of the EU reached 16.27 trillion accounting for 21.3% of global economic output in 2011; the official gold reserve of the euro zone totaled about 11,931 tons, taking up 40% of the official world reserve and the outbound volume of FDI of the European countries in 2009 amounted to 9,983.3 billion US dollars. Taken as whole, all of these can help explain the existence of the “second economic Europe ”in the world. So in this sense the European economic crisis has certainly produced a crippling effect on China, which is highly dependent on foreign markets.

Second, the EU, taken as an entity, has been China’s largest trade partner. But it is very difficult to adequately implement what the word “strategic” really connotes as is spelled out in the “Sino-EU Comprehensive Strategic Partnership”, which so far has not yielded any significant accomplishments between the two sides. Economic trade relations still figures prominently in the relationship between China and Europe. The Sino-German relationship, for example, mainly hinges on “business activities”, which covers such areas as foreign trade, investment, scientific cooperation. But the current economic plight of EU, as is felt by all of us, has not only hampered China’s export to Europe, but also has obstructed European investment in China.

Third, as the global confidence in Euro begins to shake, it is very difficult for China to diversify and disperse its foreign exchange reserve assets with minimum risks and maximum profits. Actually China is not willing to accumulate too much dollar assets or a tremendous amount of Euro assets. But given the current international monetary system it is just not feasible to convert our foreign exchange reserve into British pounds, Swiss francs or Japanese Yens. China’s RMB, though its impact is growing, is not convertible yet, so we cannot but opt for dollar and Euro assets. We should neither belittle the hegemonic power of U.S. dollar nor show any pessimism over the viability of Euro.

Fourth, the economic plight of the EU is certainly counterproductive to the process of  multi-polarization of the world, a process which appeals to China immensely. But scholars at home and abroad should never look down upon the significance of Europe as one important polar on account of its current economic difficulties.  There is no denying the fact that Europe has always been an active and key player in formulating plans for international governance, establishing norms for international organizations, drawing up international rules and regulations, solving and mediating international disputes, providing international aid etc., all of which have demonstrated the indispensible and unique role by Europe. It seems that Europe is not deeply affected by the current economic plight, showing a strong resolve to “go it alone”, which clearly dwarfs the United States in terms of the impact it has generated. 

Fifth, the EU’s economic difficulties may further highlight the complicated and sensitive relationship between Europe and China, since some Europeans are quite apprehensive of the emerging economic and political power of China. By the same token, some Chinese scholars also tend to regard Europe as “an aristocrat in decline”, “an empire on the wane”, “an improvised arrogant man-of-wealth”, a viewpoint shared by many Chinese people but it will not definitely serve the purpose of promoting mutual understanding and friendship between the two peoples. Personally, I tend to hold a critical yet cautiously optimistic attitude toward Europe, since it is still marching at the forefront of our times and has always been the forerunner for the past 500 years in the history of human civilization development. But it can not be guaranteed that a forerunner should never lag behind and can always be successful, because it may encounter numerous failures and setbacks, from which it can learn to benefit before embarking on the road ahead. In the light of the status quo of Europe, the social security system and the new state-to-state relationship as manifested in the framework of EU are the two typical cases to explain the its economic difficulties.  

Now comes the positive ones.

First, the economic plight of Europe has greatly diminished the effect, appeal and the persuasive power of the western system, a view which is also echoed and shared by the western and Chinese scholars alike. So this has resulted in a clear and overwhelming consensus among the Chinese academia.

They regard it as a natural and inevitable development for the emerging countries to catch up with and surpass the already developed ones in the course of human history, as is illustrated in the cases of Germany catching up with Britain, Japan surpassing China and the U.S. overtaking Europe. And now this process is being greatly accelerated since the latecomers can readily make full use of the large number of achievements in the progress of human civilization and besides they have huge capacity for innovation and creativity which is also a force to reckon with.

There should be a correct understanding of the extent of the changes in world structure as a result of the process, during which the power decline of the West (including the U.S., Europe and Japan) is only relative, with the West still wielding the predominant power in the world. 

As for the question of “model” there is no hastily drawn conclusion among the world leaders. Though I am not an expert in explaining the question of “model”, I have my own criteria for it, which can be boiled down to the clarification of the relationship between “capital” and “labor”. While the U.S. is predominantly leaning towards the “capital” proclaiming itself as the free market economy “model”, most people in Europe, however, are pursuing the relative balance between “capital” and “labor”, calling themselves as the social market economy “model”.

When it comes to the “socialist model”, it should at least weigh toward “labor” in theory, which will presumably have a far-reaching effect on the world economy in the future. But it is very difficult to truly “lean toward labor” in order to maintain international competitiveness when “capital ” still enjoys absolute supremacy over “labor” in the context of globalization.

Second, the economic plight of Europe, together with the difficulties that are besetting the U.S., has greatly increased the weight of Chinese economy and made it the economic locomotive of the world economy. With the enhanced political influence of China, some westerners also begin to lament the declining power of Europe as opposed to China, attributing it to their sluggish economy. In recent years China has registered rapid growth in its GDP while the Western economy is still locked in stagnation, which will likely continue for a long time to come and will tip the balance in favor of China.

Third, the difficulties of European economy have resulted in asset depreciation of numerous companies, which makes China’s expansion of investment in Europe possible and attractive. Apart from the resources, China is most interested in the European technology and market, which also includes brand names, trademarks and patent rights. All of these can be expedited and accomplished by way of acquisition of the valuable assets of the European companies, which is undoubtedly beneficial to the economy of Europe.

Fourth, as for the economic plight of Europe and the western economy as a whole, it is quite clear to the Chinese that the west will recover from the recession and its economy will rev up at a new higher level in a matter of two or three years (four or five years at most). It may be also possible by any stretch of the imagination that, after going through the international financial crisis, the world economic crisis, the sovereign debt crisis and the European integration crisis, the EU and the Euro zone will emerge as a renewed powerhouse in the world. Such a prediction will not only help promote the change in our growth pattern and a readjustment and enhancement of our economic structure but also will prepare China to improve its international competitiveness so as to be ready to take on the new fierce competitions including trade frictions and disputes in the future.

Fifth, European economic crisis has certainly benefited China in many ways, which is tantamount to giving us a lecture free of charge. For example, policies with regard to our social welfare should be made in line with our capabilities, the expenditure and revenue of our finance should be properly balanced and the monetary supervision should be strengthened with an aim to steadfastly pushing forward our reform and striking a balance between the reasonableness of economy and the practicability of the politics.

(This article is the author’s presentation at the CASS Forum on European Transformation organized by IES, on October 10, 2012.)