Europe Sells Out to China

by Peter Martino

The process of European unification has for many years been sold to the unwilling nations of Europe, who do not want to lose their national sovereignty,with the argument that unification would make the voice of Europe stronger in a world where the importance of Europe was gradually fading and the importance of newly developing economies such as those of the so-called BRIC countries (Brazil, Russia, India and China) is growing.

European unification was a political project. A monetary union of nations with different cultures and economic structures was deemed necessary for political rather than economic reasons. The collapse of the European monetary union, which is currently taking place, proves that economic realities are stronger than political ideals.

Those who attempt to achieve political ideals while denying economic realities often end up achieving exactly the opposite of what they had hoped. Last week, the heads of government of the 17 nations which use the euro as their common currency, recognizing that the eurozone bailout fund EFSF (European Financial Stability Facility) needs more capital to support the euro, decided to ask third countries such as the BRIC – and in particular China, which holds 60% of global capital reserves – for help.

The latter's help is necessary because European taxpayers are no longer able or willing themselves to devote more money to the EFSF. The countries in Southern Europe with their huge government debts are not capable of doing so, while the countries in the North are not willing to spend more of their taxes on the South. The Germans in particular, who have gone through severe austerity programs to cut their deficit, are opposed to paying for nations such as Italy which failed to introduce similar austerity measures and carried on borrowing -– with the result that Italy now risks bringing down the whole eurozone with its excessive debts.

It remains to be seen whether China is willing to provide capital for Europe when the Germans themselves refuse to do so. EFSF Chief Executive Officer Klaus Regling, a German, is currently negotiating with the Chinese. So far he does not seem to have been successful. Many observers think that China will come to Europe's rescue, though China will demand a price for it. The Chinese are expected to demand a larger say in the IMF, at the expense of Europe, and easier access for Chinese exports on European markets.

Instead of making Europe's voice stronger in the world, the EU will have obtained exactly the opposite. It will have made Europe's voice weaker and China's voice stronger.

European unification was also sold with another argument: it would lead to greater understanding and more solidarity between the peoples of Europe. The present crisis, however, is exacerbating the tensions.

Avoiding Greece's bankruptcy has been relatively easy for the eurozone; Greece is one of the eurozone's smaller countries and its government debt is "only" €340 billion. Nevertheless, the eurozone has not been able to force the Greeks to live up to their promises -– such as a privatization program of €50 billion -– which it made in return for the €110 billion bailout it received so far. Last week, an agreement was reached to give Greece a second bailout of another €130 billion. The Greeks had to promise an additional €15 billion in privatizations, but given that the first goal of €50 billion will not be met, few believe that the goal of €15 billion will. Last week, the eurozone leaders also decided that the private sector must allow Greece a debt haircut of 50%, amounting to €100 billion. In effect, the two bailouts and the haircut amount to a sum of €340 billion, which is the total Greek sovereign debt.

Italy, however, has a government debt of €1,800 billion. If Germany and other northern European countries have to save it, it will cost them so much that their own credit ratings are likely to be affected. Hence their hope that China will help out. Hence, too, their pressure on Italy to introduce serious austerity measures.

Ten days ago, German Chancellor Angela Merkel and France's President Nicolas Sarkozy made it clear to Italian Prime Minister Silvio Berlusconi that Italy had to come up with a serious plan to reduce its budget deficit. Berlusconi felt humiliated, but he seems to have got the message. Within three days he presented a plan to achieve a balanced budget by 2013 and a surplus in 2014.

Berlusconi managed to secure a plan to raise the retirement age to 67 years by 2026, although there are rumors that his coalition partner, the Lega Nord party, only accepted the retirement plan on condition that Berlusconi resign as Prime Minister at the end of the year.

The problem with Berlusconi, however, is that he has announced austerity programs in the past but has always watered them down, never keeping his word. Italy has failed to save for its own retirement pensions while the country is aging at a fast pace. The Germans, confronted with the same problem of an ageing population need so many funds to prepare for it that they cannot spare the money to help the sluggish Italians.

Two leading German economists, Hans-Werner Sinn of the Ifo Institute in Munich and Ansgar Belke of Duisburg-Essen University, fear that Italy's plans come too late to save the country from needing outside help. They both warn that if Germany offers to help Italy from collapsing, Italy will drag Germany down with it.

Last Sunday, the British historian Niall Ferguson told the newspaper Welt am Sonntag that Italy is politically ineffectual. In the eyes of many Germans, Ferguson is right. In the past, the weaknesses and ineffectualness of the Italian economy were reflected in the value of its currency. Within the euro-currency framework this is no longer possible because the currency now reflects the common denominator of the whole eurozone. Countries such as Italy even have internal economic cultures that are so divergent -- such as between the North and the South of the country -- that the country itself is politically unstable. Berlusconi's Lega Nord coalition partner is demanding greater autonomy -– also economically –- because it wants to distance itself from the South.

In a sense, Europe's problems are just a reflection on a larger scale of the inter-Italian problems. With Italy's North unwilling to pay for its South, and with Europe's North unwilling to pay for its South, the solution now must come from a deus ex machina called China. This proves that Europe is fundamentally unable to solve its own problems. European unification has not solved this problem. It has made it more acute. By "selling out" to China, on the terms which China will set, it is now clear for all to see that the European Age is over, and the Age of China and the other BRICs is dawning.

Peter Martino

Source: http://www.hudson-ny.org/2548/europe-sells-out-to-china

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