SAVING THE EURO: WHAT’S CHINA’S PRICE?
SAVING THE EURO: WHAT’S CHINA’S PRICE?

Author(s): François Godement
Subject(s): Supranational / Global Economy, Economic policy, Geopolitics
Published by: ECFR European Council on Foreign Relations
Summary/Abstract: Although Europe needs external lending and the show of confidence it brings, its attempt to persuade China and other emerging economies to enlarge the resources of the EFSF is likely to bring only limited results. However, there are various other scenarios under which China and other investors may lend to Europe. The best case scenario from Europe’s point of view is that it would increase the lending capacity of the EFSF or the ECB and turn them into a super borrower and lender. But this scenario is unlikely to become a reality because it requires a “big bang”-like reinvention of European public finance for which there is no commitment. More likely is that the ECB will underwrite a new IMF fund dedicated to the support or rescue of European member states. This would mean a larger Chinese contribution in IMF decisionmaking. Alternatively, China could seek to lend to Europe in renminbi, thus transferring the exchange risk to the European borrower. Such a deal would also offer China an unprecedented guaran-tee against any depreciation of the euro. Finally, the euro could collapse altogether and the IMF could be called in – the worst case scenario. In any case, Europe should acknowledge the interdependence between it and China and therefore its need for external capital.

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