Raising Money for the Euro Zone Warnings Mount against Concessions to China
The euro zone is looking for outside investors, but some fear that Brussels could offer China political concessions in return for cash. The head of Germany's powerful industrial federation has warned against such a course. But Europe, in the end, may have little choice.
In the run-up to last week's European Union summit, the consensus was clear. Europe's bailout fund, the European Financial Stability Facility, was simply too small. The fund's lending capacity of 440 billion would never be enough, it was said, to stop the spread of contagion to larger euro-zone economies like Italy and Spain.
Now that euro-zone leaders, led by Chancellor Angela Merkel and French President Nicolas Sarkozy, have agreed to leverage the EFSF, however, they are realizing that finding investors to back an increase in the fund's lending capacity to 1 trillion might not be as straightforward as they first thought. Indeed, European fundraising is likely to play a major role at this weekend's G-20 summit in Cannes, France.
So too, though, are warnings that the euro zone should steer clear of acceding to possible Chinese demands for concessions should it invest in the EFSF.
"If we in Europe organize the stabilization of the euro in such a way that we allow states to exert political influence from outside, then we are making a tremendous mistake," Hans-Peter Keitel, president of the Federation of German Industry, told SPIEGEL ONLINE in a Monday interview.
Keitel was referring to hints voiced by Li Daokui, a member of China's central bank monetary policy committee, that China might ask Europe to cease criticizing its policy of keeping its currency, the renminbi, artificially undervalued in return for investment in the EFSF. "The last thing China wants to do is throw away the country's wealth and be seen as just a source of dumb money," Li told the Financial Times last week.
Quid Pro Quo
Others have speculated that China could ask for better access to European markets or a cessation of critique on the country's human rights abuses. "There will be some quid pro quo on this," Mohsin Khan, a former International Monetary Fund official now with the Peterson Institute for International Economics, told Bloomberg.
In a Monday editorial, the Financial Times put it even more succinctly. "Beijing will exact a price proportional to the desperation exuded by Europeans," the paper wrote.
The euro zone began courting China almost as soon as the ink was dry on the final summit statement Thursday morning. Sarkozy spoke with Chinese President Hu Jintao on the phone to discuss Chinese investment in the fund and EFSF head Klaus Regling flew to Beijing last Thursday, also to gauge interest.
In Vienna on Monday on his way to the G-20, Hu said that China would provide assistance to Europe. His country, he said, is convinced "that Europe possesses the wisdom and the ability to overcome the current situation."
So far, though, there are few details about just what a newly revamped EFSF might look like. A special purpose investment vehicle to attract money from outside investors was presented as one of two possible plans to leverage the fund. Euro-zone leaders have said that final details won't be ironed out until the end of the month. Furthermore, with Greek Prime Minister Giorgios Papandreou having announced on Monday evening that his country will be holding a referendum on the EU bailout package for his country, the euro-zone strategy to prop up the common currency appears to be in doubt.
"Unless European leaders can flesh out some of these details very quickly, it's hard to see the rest of the G-20 coming on board with very great enthusiasm," Eswar Prasad, a senior fellow at the Brookings Institution in Washington, told Bloomberg.
Not Enough Information
Still, other countries in addition to China may be interested in investing in the EFSF as well. A top Kremlin economic advisor said that Russia could make up to $10 billion available through the IMF. He said "it is important for us for Europe to remain stable." Japan has said merely that it would continue to buy bonds from euro-zone countries.
Brazil, for its part, has said it will wait for more information before making a decision. "At this point we are not considering it because we don't have enough information," Reuters quoted a Brazilian source as saying.
The drive for EFSF investors has highlighted Europe's growing reliance on major emerging economies -- and also China's increased influence on the world stage. A French government official on Monday insisted that China would not be offered political concessions in return for EFSF assistance. Not everyone, however, is quite so sure. "There's no reason now why China should budge on anything," a G-20 official told Reuters on Monday.
Keitel of the Federation of German Industry, for his part, is concerned. "It would be crossing the line were euro-zone countries to say 'we'll offer you a political trade-off if you make money available to us,'" he told SPIEGEL ONLINE. "We have to have confidence that we can achieve stability ourselves."
cgh -- with wire reports
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