Euro crisis

latimes.com
French fear being indebted to China
In France, many on both sides of the political spectrum worry that they will surrender some of their sovereignty if China helps fund a European bailout.
By Devorah Lauter, Los Angeles Times

8:35 PM PST, November 26, 2011

Reporting from Paris

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In front of the horse-meat butcher shop she runs with her husband on Rue de la Roquette, Marie-Francoise Peltier reminisced about how things used to be in this enclave of Paris' 11th arrondissement, back when the street was lined with neighborhood boulangeries, cafes and boutiques.

"It was like a little village here," she said.

In the late 1980s, several struggling textile shops around long, narrow Rue Popincourt were acquired by Chinese importers. They prospered, attracting others who bought out more of the surrounding small businesses that were unable to make ends meet.

Within a decade, as closing time came around, the metal shutters of the wholesale clothing shops would roll down and Rue Popincourt would go dark: a mini-industrial zone in the heart of Paris.

On its small scale, this neighborhood has experienced some of the anxiety now being felt as the European Union looks to emerging nations, and especially to China, to invest in its teetering finances to calm panic over the bloc's massive debt crisis.

Any Chinese bailout for Europe is unlikely to re-create Rue Popincourt's experience across France. The Chinese money would be used to beef up a European-wide line of credit aimed at insulating beleaguered economies such as Greece and Italy from their high-debt troubles. And so far, the Chinese have shown no enthusiasm for putting their money into Europe's troubled hands.

But that has not stopped many here in France, on the right and the left, from worrying that they would surrender some of their sovereignty should China change its mind about tapping its stash of foreign reserves to contribute to a bailout.

"We're going to put ourselves in the wolf's mouth, once we've taken this money that I call dirty money," right-wing lawmaker Nicolas Dupont-Aignan said recently, adding that any deal would be like "prostituting" Europe.

The Green Party's leader, Eva Joly, fears "selling Europe in chunks to China."

More moderate critics of any EU-China deal come from the ranks of mostly left-leaning political figures, including Socialist presidential candidate Francois Hollande. They argue that any increase in financial dependency on China would diminish French and other European influence over the emerging superpower, limiting leverage on issues such as human rights and international trade.

Of course there are others, including members of the French government, who profess that there is no downside to fishing for Chinese aid.

If Beijing "decides to invest in the euro instead of the dollar, why refuse?" said French President Nicolas Sarkozy, who led Europe's cap-in-hand appeal to Chinese authorities. "Our independence wouldn't be threatened in any way," he said.

"Withdrawing into oneself is absurd," right-leaning former Prime Minister Jean-Pierre Raffarin said in a recent interview with the French weekly JJD. "The European and American economic motors are out of order. China has stepped in."

But behind much of the anxiety is "a lot of mystery" about China, coming "not just from the French, but from Western imaginations," said Jean-Philippe Beja, a senior researcher on China at the Center for International Studies and Research at Paris' Sciences Po university.

"We see this great power, and wonder in what direction it will go … and there's a sense of the circumstances being flipped, with what people see as an underdeveloped country coming to save us," he said.

Despite it being "totally false," Beja said, "today we have this image of a triumphant China that is conquering everything."

Although China is expected to ask for improved market access in exchange for investment, and possibly a relaxation of an EU arms embargo, Europeans probably will not notice a major difference in their way of life after a deal. Europe already accounts for about 20% of Chinese exports.

Nevertheless, "we are going from a China that is still largely in development, to a China that has a stronger hand in the market. And that's a big change on the international scene," Beja said.

Sacha Lin, who helped mediate tensions between residents and Chinese merchants on Rue Popincourt through his Assn. of Young French Chinese, said that "vilifying" public arguments on a Chinese bailout "spread unfounded prejudice."

"Of course it bothers us," he said of the group, which was created "because we felt that there was a problem with the image of the Chinese community, from those who were unfamiliar with it."

"This is not some kind of aggressive buyout," he said. "China isn't forcing Europe to take its help. Europe is the one asking China for help."

Both the national debate and the tension that roiled the Popincourt neighborhood, he said, "have that in common: We are the extraterrestrials."

But down the street from Peltier's butcher shop, a woman who runs a traditional cheese and wine shop said that Chinese merchants had saved what was a depressed neighborhood, "with no center, and no demand."

"I prefer this to what we had before, with French businesses going bankrupt," said the woman, echoing the views of others in the area who support the presence of the Chinese wholesalers.

Perhaps tellingly, however, she would not provide her name, concerned that other residents would react negatively to her comments.

Lauter is a special correspondent.

Copyright © 2011, Los Angeles Times

China says thanks but no thanks for invitation to rescue Euro
Why should a poor nation help a fat cat? Doesn't make sense


China says cannot use reserves to save Europe
By Michael Martina | Reuters – 21 hrs ago

BEIJING (Reuters) - [/BEurope cannot expect China to use a big portion of its $3.2 trillion foreign exchange reserves to rescue indebted nations, a top Chinese foreign ministry official said on Friday, Beijing's strongest rebuttal yet to suggestions it should bail out the euro zone.

Vice Foreign Minister Fu Ying said at a forum that the argument that China should rescue Europe does not stand and that Europeans may have misunderstood how China manages its reserves.

She did not explicitly rule out using part of China's reserves for more targeted measures, but implied China was not going to ride in with a big chunk of its "savings" and bail out crisis-stricken Europe.

"We cannot use this money domestically to alleviate poverty," Fu said. "We also can't take this money abroad for development support."

Economists estimate that Beijing has already invested a fifth of its reserves in euro assets.

While the size of China's reserves is the largest in the world, analysts say two-thirds of that is locked up in dollar assets that cannot be sold, giving Beijing a more modest portion of about $470 billion to invest each year.

Fu said China's reserves are akin to the country's savings and that the 1997 Asian financial crisis taught Beijing how important reserves are to the nation.

China's Foreign Ministry does not exert direct influence over how the country invests its foreign exchange reserves but can comment on that policy.

Fu said Beijing's refusal to use its reserves to ease Europe's debt woes does not count as a lack of support for the region, which is also China's biggest export market.

"I say the idea that China should save Europe does not stand. What I mean is the money cannot be used this way," Fu said.

"China has never been absent from any international efforts to help Europe. We have always been an active participant, and a healthy participant as well."

As the owner of the world's largest foreign exchange reserves, China is one of the few governments with pockets deep enough to buy a sizeable portion of European government debt and help pull the region from its economic malaise.

Proponents of this argument say China helps itself when it helps the euro zone as it allows Beijing to diversify its reserves from the dollar, and foster economic growth in China's biggest export market.

But China has been cool to such propositions and has not committed publicly to contributing to Europe's bailout fund, despite being courted by the fund's chief last month.

(Reporting by Michael Martina; Writing by Koh Gui Qing; Editing by Ken Wills)

The Euro crisis at its heart is a crisis of confidence in how the Europeans run their countries and manage the Eurozone.

The Euro crisis is happening precisely because many of its member states have too much debt and the Germans seem to lack the will to do what is needed.

Unless those fundamental problems are addressed, no amount of money will solve this crisis. China pouring its reserves in will only serve to buy the European leaders more time. But at present, all they are likely to do with that time is to dither some more until things come to a head again. The only difference would be that when that happens, China will be dragged down with them.

So of course the Chinese are going to say 'Hell No!' to the offer until the Euros can demonstrate that they have what it takes to actually tackle and resolve this crisis.

Ironically, there would be no crisis if they had been able to demonstrate this ability to start with.

Hendrik_2000 said:

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that's a polite way to say, you wish!

Well, "what it takes" is a unified state, and the euros certainly don't have that. I suspect the Europeans thought, back in 1992, that greater political unification would follow much sooner than it has. Britain has always been against this, but the Iraq war brought out differences between the "old" Europe and the "new" one, and from 2005 on, the more confrontational American policy towards Russia exacerbated the differences further.

In any case, it seems that steps towards greater integration is, in part the solution being offered by the bigger players, and of course, the British are screaming about "democracy" being trampled (because they're against further integration, and obviously against the Euro itself, since they didn't join it).

As to the German position, I think it's natural: they don't want to give their wealth away without something (political) in return. They are criticized, mostly from the American direction, for not being "decisive" (giving "decisively"), but their situation is entirely different from that of the US, precisely because American stimulus is all within the same state (country), while Germany is being asked to rescue those it has no control over.

The whole idea behind the EURO and just about all other "advances" of the European project was that the union would be strengthened by an agreement between "prime ministers and heads of state" or occasionally just ministers and the parliaments of the members states would be told accept or "our country will isolate itself within Europe". The European Parliament has no say about very nearly everything. This has now led to disaster to such an extent that the governments of Greece and Italy have been changed by pressure exerted by the European Central Bank manipulating the value of the debt of these countries.
The UK is mostly concerned in the profits to be made in the "Square Mile" of banks and other financial corporations in London. A few years ago about a sixth of all the profits in the UK accrued there while industry withered. It tried to resemble its colony of the Cayman Islands. However several companies in Asia saw the madness of this and bought British Steel ( Tata ), Jaguar and Land Rover ( also Tata ), the MG car plant in Longbridge is now owned and operated by Shanghai Automotive.
In short what it takes is a return to democracy and industrial production. There is a lot wrong with Germany but a lot more with other European countries.

Well guess its a good thing they didn't join the EU.


UK's debts 'biggest in the world'
COMMENTS (720)

Household debt in the US and elsewhere surged in the boom years, with dire consequences
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At the beginning of 2010, I highlighted a fascinating analysis by the consultants McKinsey called Debt and Deleveraging, which showed quite how indebted the economies of the developed west had become.

McKinsey said that the UK had by 2008 become the most indebted of all the big, rich economies, more indebted even than debt-engulfed Japan.

It has now become widely recognised that perhaps the greatest economic policy failure in the UK, US and eurozone during the 16 boom years before the crash of 2008 was the explosion of borrowing by banks, households, businesses and governments - or, to use the jargon, the unprecedented and massive leveraging up of entire economies.

These giant debts triggered the crash of 2008 because creditors refused to roll over short-term loans to banks, and caused the simultaneous recession because banks stopped lending, and have brought about our current economic malaise because our ability to spend and invest is hobbled by the imperative of repaying what we owe.

That is why getting the debt down to prudent levels is the most important economic challenge of our time.

As it happens, how we became so indebted and what to do about it, is what I am examining in a two-part documentary, called The Party's Over, that will be broadcast on BBC Two at 1900 on 4 and 11 December.

But how have we done since 2008? Are we getting the debt down?

Well, McKinsey is updating its 2010 report and has shared its interim findings with me (some of which I wrote about on Friday in my note on why investors are as wary of lending to Spain as to Italy).

These findings are not comforting.

According to the consulting firm, by the end of March this year, the aggregate indebtedness of the UK - that's the sum of household debts, company debts, government debts and bank debts - had risen to 492% of GDP, or almost five times the value of everything we produce in a single year.

That compares with 481% at the end of 2008.

So the UK's total indebtedness has increased, and is still the biggest relative to GDP of any of the big economies. That said, Japanese indebtedness is pretty much the same size - at the end of 2010, as opposed to the end of March 2011, Mckinsey says Japan's debts were also 492% of GDP.

US indebtedness is less, at 282% of GDP by the middle of this year, down from 296% in December 2008.

In the case of America, government debt is on a steeply rising trend, jumping from 61% of GDP to 80% over the past two and a half years.

But household debts have fallen from 98% of GDP to 87% of GDP, as homeowners have handed back the keys of their houses to lenders and reneged on the debts (which is possible in much of the US, but almost impossible in the UK).

So what's going on? Why are UK debts still going up?

Well partly it's to do with a phenomenon I've discussed here many times, that debt has been shuffled from the private sector to the public sector.

When banks stopped lending, and private-sector spending and investing collapsed, governments continued to spend, even though tax revenues were falling. So public-sector borrowing exploded.

To be clear, if governments had not continued to spend, our recession might well have become something much worse, a 1930s-style depression.

But it is fair to say that a consequence of banks, households and businesses trying to repay their debts has been a big increase in government borrowing.

Here are the numbers. From the end of 2008 to the spring of this year - so during the course of a bit more than two years - the debt of British companies fell from 122% of GDP to 109%, and the debt of households fell rather less, from 102% of GDP to 97% of GDP.

Most would say those are positive trends, although the pace of debt repayment by households is pretty sluggish and our personal debts (at close to 100% of GDP) remain substantial (and a worrying burden) by historical standards.

By contrast, government debt has risen from 52% of GDP, which at the time was pretty low by international standards, to 76% of GDP, which is more or less standard for the rich west.

But as you'll know, UK government debt remains on a fairly sharply rising path (the government's deficit is some distance from being closed).

One other slightly surprising and - perhaps - disturbing trend is that the debt of financial institutions has risen, from 205% of GDP to 210% of GDP.

In McKinsey's definition, this financial institution debt excludes bank lending to households and non-financial businesses, to avoid double counting. Its substantial size is a reflection of the size of the UK's financial services industry, the City of London.

McKinsey believes, however, that this increase in financial institutions' debt disguises a positive trend: much of the debt is now of a longer-term nature, so poses less of threat to the stability of the economy (it can't be called in at a moment's notice, to the potential ruin of the borrower).

The point is that if excessive debt is the disease, what we've had since the end of 2008 is analgesic and sticking plaster, rather than cure.

Record low interest rates and the creation of £275bn of new money through the quantitative easing programme have made it possible for us to live with our debts - cheap money has made the debts bearable.

But we haven't as yet found a way to get the debts down so that we can be confident that our economy's foundations are solid and sound again.

What it means is that we must brace ourselves for many years of relatively low growth, perhaps 1% versus the 3% of the 16 boom years before the crash, because we no longer have the fuel of borrowing more and more every year.

How we reconstruct our economy to generate sustainable growth, and how - in the meantime - we cope with flat or declining living standards, are the themes of those films that I mentioned earlier (in case you've forgotten, 4 December and 11 December on BBC Two).