mao eyes crop
By Calvin Garner Editor in Chief September 19, 2011

China is offering a bailout to Europe’s troubled economies. EU leaders should say “no thanks.”

Radical austerity measures, debt crises, cuts to social policies, financial instability, a weakening banking sector – much of the world looks at Europe and sees an economic disaster area.

China, on the other hand, sees an opportunity and is looking to make a deal.

Chinese Premier Wen Jiabao announced last week that future Chinese investment in the continent―investment that would presumably ease the pressure on cash-strapped European governments―could be linked to normalization of trade relations between China and the European Union (EU). In exchange for agreeing to increase lending to Europe, China would like to see the EU reclassify China as a “market economy,” rather than its current designation of “nonmarket economy.” This policy change would fundamentally alter the legal basis for trade between the EU and China, making it much more difficult for the EU to penalize China for dumping goods that are sold below what it costs to make and market those goods.

As EU leaders seek to shore up the balance sheets of member states, one could certainly understand why an offer of Chinese largesse would seem very appealing. But regardless of how much China offers, Europe should say no.

First of all, agreeing to the deal would look very, very bad. China has made similar demands before, and Europe has said no. Now, as it struggles to assure the world that it has control of its fiscal situation, that its debt is trustworthy, that its banks are safe, Europe really ought not to appear so desperate for cash. Capitulating on a major trade policy would stink of desperation could send the wrong signal to markets.

What’s more, European leaders should not worry that Chinese investment will disappear any time soon, even if they reject Wen’s offer. China could very well be bluffing. Withholding investment – the implicit threat in Wen’s offer – could damage the EU economy as it struggles through the current global economic slump. But the EU is China’s number one trading partner, so China has little interest in taking steps that would result in Europe’s economy worsening. It seems unlikely that China would harm such an important trading partner in order to obtain “market economy” status, a status it will be granted automatically in 2016.

Additionally, this deal – a concrete concession on trade policy for unspecified investment in the future – would only encourage China to use its tremendous foreign currency reserves as leverage for policy concessions. Such a swap would set a troubling precedent for future negotiations by showing the Chinese that they can blackmail the EU when it faces crises.

Moreover, there is no guarantee that China is willing to offer enough financial assistance to stave off the current round of troubles. European leaders have not been able to solve their debt problems by throwing money at the problem. New shocks to the continent’s economy have created new problems. There is little reason to believe that this new infusion of cash will prove to be a silver bullet for Europe’s problems. Europe could be trading something for nothing, if another round of distressing economic news leads to further deterioration in European sovereign debt.

Finally, the EU should reject this offer because it is unrelated to the root cause of Europe’s troubles. It is certainly possible that Chinese investment would reduce the financial turmoil that many European countries are facing. In fact, the suggestion of the offer helped to send European stock markets higher in the middle of last week. But European leaders must understand that more or less Chinese investment will not address the root cause of their debt problems or prevent the crisis from worsening. For that to happen the EU must face the hard reality of having a supranational monetary policy and national fiscal policies.

Proponents of the deal might argue that the time has come for the EU, a self-proclaimed champion of free and fair trade, to normalize trade relations with the world’s second-largest economy. These proponents may be right. But that conversation should occur on its own merits, rather than being linked to unrelated international investment issues.

When the British first applied for membership in the European Common Market―the precursor to the European Union that exists today―French President Charles de Gaulle called a press conference that is remembered for a simple, stunning, one-word rebuke: “Non.” EU leaders should channel the cantankerous Frenchman and deliver the same answer to Premier Wen.

Photo courtesy of via Flickr.