China’s friendly blackmail of EU may do the trick

September 14, 2011

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s no surprise that China’s pledges of support for indebted trade partners come with strings. But Premier Wen Jiabao, addressing the World Economic Forum on Sept. 14, was unusually blunt about what he expects in return: to be named by Europe as a market economy. That would cost Europe little — but that doesn’t mean it should agree.

Chinese investment must look more appealing as stricken euro zone states like Italy, Greece and Spain face up to the possibility investors will refuse to finance their deficits. Italy’s gouging by bond markets on Sept. 13 gives a taster. Just a drop of China’s $3.2 trillion in foreign exchange reserves would give troubled countries a reprieve, and help lower their bond yields.

Market economy status is, on the face of it, an easy thing to give in return. After all, it’s just a label. But without it, countries can accuse China of dumping goods, and then use other countries’ prices -– say, India’s energy prices or Thailand’s land costs -– to prove their point. Under World Trade Organisation rules, China gets market status anyway in 2016, but as Wen says, bringing that forward a few years is the kind of thing one might expect “from one friend to another.”

Perhaps. Only China isn’t a market economy -– it’s a “socialist market economy.” Some important hallmarks aren’t there. The exchange rate is guided more by policy than market forces. Capital is allocated by decree rather than just by price. True, China isn’t the command economy it was under Chairman Mao. But the suppressed rate on deposits, for example, or the inflated lending rates for small companies, show that not everything is pure supply and demand.

So while Europe could give China what it wants -– and it has flexed the “market” definition before for Russia -– it’s hardly a commendable course. Far better for Europe’s leaders to get their own house in order, including planning for a Greek default and pushing Italy to cut back its debts. That might sound like harder work. But it would have the added appeal of making China’s veiled ultimatums redundant.

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Euro Desperates are going to take China and the BRICS up on the ‘helping hand’ because it’s a way for Germany and France to avoid doing too much heavy lifting.

If China was asking for 51% stakes in vital EU infratructure and industry, then you’d have a point. But all China wants is to slip the froggy’s foot into the lukewarm water. The leg, then the other leg, then the torso will come later, along with turning up the heat.

But right now it’s just not nearly as scary as what happens if they DON’T take China’s help. And there’s just no political will for Europe to fix its own self.

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