Will China Allow European Union to Fall

8/3/2019 Will China Allow European Union to Fall

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WILL CHINA ALLOW EUROPEAN UNION TO FALL???

In the present context of globalisation and international trade, economies are so linked to the growth

of each other. As we have seen earlier in 2007-08¶s Subprime Crisis, fall of Lehman Brothers clicked

the failure of many big names in the world and sentiments of recession were seen across the globe

where all economies suffered the growth.

World was just recovering from that we had another recession monster looming on the world in the

form of EUROPEAN DEBT

With a combined population of over 500 million inhabitants,[17]

the EU generated a GDP of 16.242

trillion international dollars in 2010 which represents an estimated 26% of global GDP (15.203

trillion international dollars or some 20%, when measured in terms of purchasing power parity).

Countries at international level should/will come together for rescuing EU not for the sake of EU, but

for their own economies growth and survival.

While US itself suffering from low growth (stagnation) and high unemployment problems, the only

power in the world that can rescue Euro Zone is CHINA

EU-China trade has increased dramatically in recent years. China is now the EU's 2nd trading

partner behind the USA and the EU's biggest source of imports by far. The EU is also China's biggest

trading partner

Trade in goods

EU goods exports to China 2010: ¼113.1 billion (+38% on 2009)

EU goods imports from China 2010: ¼281.9 billion (+31% on 2009)

EU's imports from China are mainly industrial goods: machinery and transport equipment

and miscellaneous manufactured articles. EU's exports to China are also concentrated onindustrial products: machinery & transport equipment, miscellaneous manufactured goods

and chemicals.

Trade in services

EU services exports to China 2010: ¼20.2 billion

EU services imports from China 2010: ¼16.3 billion

Foreign Direct Investment

EU inward investment to China 2010: ¼4.9 billion

China inward investment to EU 2010: ¼0.9 billion

China's pile of $3.2 trillion in foreign exchange reserves, the biggest in the world, keeps growingthanks to trade surpluses and capital inflows.

Analysts estimate that China holds about a quarter of its foreign exchange in euro assets, andthere are few other places for it to park investments of such a scale.



China in the World Trade Organisation

The EU was a strong supporter of China's accession to the WTO, arguing that a WTO

without China was not truly universal in scope. For China, formal accession to the WTO in

December 2001 symbolised an important step of its integration into the global economic

order. The commitments made by China in the context of accession to the WTO secured

improved access for EU firms to China's market. Import tariffs and other non-tariff barrierswere sharply and permanently reduced. While China has made good progress in

implementing its WTO commitments, there are still outstanding problems. The EU also uses

the regular Trade Policy Review of China in the WTO to raise a number of concerns

regarding China's trade policy. These include inadequate protection of intellectual property

rights, the maintenance of industrial policies which may discriminate against foreign

companies especially in sectors like automobiles and barriers to market access in a number

of services sectors including construction, banking, telecommunications, and express postal

services). Access to raw materials has also been identified as a major trade obstacle as well.

Facts and figures on EU-China tr ade

China is the second largest economy and biggest expor ter in the worldIts growth in 2010 was above 10%, and international estimates predict China may be ontrack to become the world¶s biggest economy within the next 5-10 years. China¶s rise asa major global economy was boosted by its WTO membership in 2001, which made itreform and open up its economy. This has provided a platform for China to establish itself as a major global trader and the world¶s biggest exporter.

o China and the EU are tr ading more than ¼1 billion every day

Just two decades ago, China and the EU traded almost nothing. Today, they form the

Second-largest economic cooperation in the world. In a remarkably short timeframe, their economies have integrated to a point where it is difficult to imagine one without the other.Our bilateral trade in goods reached ¼395 billion in 2010, almost ¼100 billion more thanthe year before.

O China has become the f astest growing market for European expor ts

In 2010 our exports to China increased by 37% to reach a record ¼113 billion. The EU isalso China¶s biggest export destination with goods and services amounting to ¼282billion. This produced a trade deficit of ¼168.8 billion with China in 2010, just below the2008 record of ¼169.5 billion. This figure fell to ¼132 billion in 2009, driven mainly by a



drop in imports from China due to the crisis. Europe´s trade deficit with China is mainlycaused by sectors like office and telecommunication equipment, textiles, iron and steel.

o About half of China's expor ts are currently produced by foreign invested

companies Neighbouring Asian companies in Japan, Taiwan, Hong-Kong and South Korea play adominant role in this process, where imported components are assembled in China andthen exported as finished products. This is called "processing trade". The role of European enterprises in China¶s processing trade regime, however, is limited. Throughbetter market access, European exporters are well placed to sell more and more of their quality products on the rapidly expanding Chinese consumer market. Although importsfrom China have surged, Asia´s share of total EU imports has remained stable over thelast decade.o The EU's tr ade defence instruments cover only around 1% of its total impor ts from

China The EU bases its trade defence instruments on strict and non-political procedures. On 30June 2011 the EU had 55 anti-dumping measures and one anti-subsidy measure in forceagainst Chinese imports.

Area of concern (why China may not help)

Only 1.7 % of the total flow of foreign direct investment (FDI) into Europe comes from China Although Chinese investments into the EU went up from ¼0.3 to ¼0.9 billion in 2010, theyonly count for 1.7 % of the total foreign direct investment made in Europe. The share of total EU flows of FDI to China stays at a steady 20%, which makes the EU´s 27 Member States together one of the top 5 FDI providers to China along with Taiwan, Hong Kong,the USA and Japan.

o EU-China tr ade in services has remained relatively stable despite the crisis

EU services imports from China account for ¼13 to ¼16 billion over the past three years,while the EU services were around ¼18 to ¼20 billion in the same period. This results inan EU surplus of around ¼5 billion.

CHINIES ECONOMY , SELF DEPENDENT

o Only 23 of the 22,000 telecommunication licences gr anted in China since 2001 are

those of foreign companies European services companies continue to find it difficult to access the Chinese market.Red tape and lengthy procedures are often the main reason. China maintains investmentand ownership caps in many sectors such as banking, construction andtelecommunications. Foreign law firms in China are currently not allowed to employChinese lawyers and are not permitted to participate in bar exams to gain Chinesequalifications.Here lies the opportunity where China can provide platform to the EU companies to expandtheir business

More than half of all counterfeit goods seized at European border s in 2009 camefrom China Intellectual property rights infringement remains a serious problem for Europeanbusinesses in China. Seven out of every ten European businesses operating in Chinasay that they have been the victim of IPR violations. In 2007, European manufacturersestimated that the loss of intellectual property costs them 20% of their potential revenuesin China. Rates of counterfeited European products were reported to be around 5-10% of EU companies' turnover in China.



.

With the China-EU trade increases, further deepening bilateral trade relations since 2004, the EU

became China's largest trading partner since theEU share of China's foreign trade has been more



than 15% this year in January to April, the EU is the largest Chinese import and export of top

Japanese earthquakes, tsunami, China's imports from Japan decreased, the European Union to

replace Japanese In March and April, the first row of China's largest source of imports after the

May and June of trade and growth is always in a high state of China is the EU's main export

products and tourism, finance, education, and large service the consumer, the EU's dependence on

the Chinese market continued to rise.

Seek a breakthrough in China-EU trade away from the crisis August 2, 2011

Although this year the debt crisis gradually into the cold abyss, but the China-EU trade is another

round of hot scenes, bilateral trade volume grew 21.3% to the future, both highly complementary

economic structure, strengthen trade cooperation, resolve their differences and friction between

the two sides have great benefits, the development of China-EU trade prospects to look forward

to.

Although the summit of EU leaders vow to save Greece and introduced many measures, but along

with the three major rating agencies, like the question of bombing of the euro zone debt crisis in

Europe is being further into the cold abyss.

However, contrast the first half of this year, China-EU trade is another round of hot scenes.

Statistics show that from January to June, total import and export between China and EU reached

265.89 billion U.S. dollars, up 21.3% of which export 1644.8 billion U.S. dollars, up 16.9%;

imports 101.41 billion U.S. dollars, up 29.1%, after the financial crisis has created a new record

for China-EU trade growth.

China's economic restructuring and upgrading in the EU deal with the debt crisis, bilateral trade

relations will surely make new breakthroughs.

Accelerate the development of general trade

Experienced a financial crisis in the world economy gradually stabilized stabilized and the EU's

efforts to deal with the debt crisis in the process, starting from November 2009, bilateral trade

access to the uplink channel, and gradually go beyond the pre-crisis levels in the last 12 year hit $

45.82 billion trade records in a single month this year in January, March and May, respectively, to

$ 45.96 billion, 475 million and $ 48 billion in continued record results In addition to decline in

February, the other month were maintained for more than 20% growth.

With the China-EU trade increases, further deepening bilateral trade relations since 2004, the EU

became China's largest trading partner since theEU share of China's foreign trade has been more

than 15% this year in January to April, the EU is the largest Chinese import and export of top

Japanese earthquakes, tsunami, China's imports from Japan decreased, the European Union to

replace Japanese In March and April, the first row of China's largest source of imports after the

May and June of trade and growth is always in a high state of China is the EU's main export

products and tourism, finance, education, and large service the consumer, the EU's dependence on

the Chinese market continued to rise.



In trade, the financial crisis, China has been by virtue of labor and resources to undertake the EU's

export processing orders, imports of industrial machinery and electronic products and components

required for such processing trade in China to the EU the main form of trade the financial crisis

After the outbreak of the European Union to reduce the processing orders, general trade in China

on the rise in the proportion of EU trade, processing trade in 2010 exceeded exports to the EU to

become the most important trade the first half, China's EU export growth of general trade

significantly higher than the processing trade, processing trade in the further decline in the

proportion of bilateral trade in the trade products in 2010 to become mechanical and electrical

products and transport equipment, EU exports to China up to the amount, the fastest growing

commodities, reached $ 60.15 billion, respectively, and 317.8 billion, up 21.6% and 72.9%,

respectively, the EU accounted for 61.7% of China's total exports of China's export of

electromechanical products to the EU has a clear price advantage, not only the largest amount of

exports, and the highest growth rate, reaching $ 178.33 billion, increase of 47.8%; transport

equipment imports into the EU from China the fastest growing commodities, imports increased by

68.2% in the first half, China and the EU import and export of electromechanical products and

transport equipment to maintain high growth in bilateral merchandise trade structure is toadvanced high-end development.

High economic dependence

EU trade with the results of both rapid economic conditions and policy has a close relationship.

EU economy battered financial crisis, the European sovereign debt crisis is fueled, to recover

quickly and to ensure sustained and healthy economic development of the EU is particularly urgent

in this context, the EU member states held a European Union summit The program seeks to

address the crisis in Germany, France took the lead out of the financial crisis despite difficulties,

but Greece, Portugal, Spain, Ireland, Italy and other countries the risk of sovereign debt crisis

remains severe, the EU is still shrouded in the shadow of the debt crisis. In order to avoid

members of the country's debt crisis dragged into a new recession, the EU needs to unite for a

member of the quagmire of the crisis still help the EU move to help rescue the debt crisis of the

EU's economic recovery and increasing foreign demand.

To strengthen China-EU trade, the EU has also developed a new trade development strategy to

develop trade with China in November .2010, the EU developed a "trade growth and world affairs,"

the strategy paper, the development of trade relations with China has become the European Union

the next five years, the focus of foreign trade policy, which guarantees the foreign trade of China

and the EU sustainable development, and in the post-crisis era continue to achieve new

breakthroughs.

China's economic development was strong, and face the task of economic restructuring and

upgrading, for raw materials, advanced technology, high-end equipment has a wide range of

needs, this is a substantial increase EU exports to China's economic conditions, while China and

the world's most advanced the two economies, the EU and the United States to maintain sound

economic and trade relations between the two can form a balance between reduction in the EU or

the United States against China's trade policies, to maximize the use of trade for China's economic



development.Recently held 25th China - EU economic and trade committee and the two sides held

the second half of the 14th China-EU Summit and 4 th China-EU economic and trade of high-level

dialogue for the development of bilateral trade and political protection .

Expansion of European imports also help to reduce the foreign exchange and RMB appreciation

pressure quantitative easing of U.S. monetary policy the dollar devaluation, China's massive dollarassets fell sharply; European sovereign debt crisis the EU for the restoration of economic

depreciation of the euro has a tendency to affect the real income of China's euro reserves, while

China's trade, capital surplus and huge foreign exchange reserves continued to pressure to revalue

the renminbi appreciation is obviously not conducive to rapid and stable development of China's

economy and smooth transition through the development and the EU trade, strongly increasing

imports, China's reserves to reduce pressure loss and appreciation of the effective way.

Fear of the impact of the debt crisis export

Although the recent China-EU trade has grown rapidly, but still face the old and new risk factors,

of which the debt crisis in Europe is the biggest risk lies.

Recently, three international rating agencies frequently cut euro-zone countries of sovereign credit

or a bank credit rating, causing the market for sovereign debt crises in Europe worry about the

deterioration of the world's major stock markets and international commodity price volatility. As

Europe has overtaken the United States China's largest export market, if the debt crisis worsening,

the trend is bound to affect the European economy, resulting in import demand for Chinese

exports to the EU market impact.

Meanwhile, EU trade friction of the situation is still grim EU in the economic recovery process in

order to enhance their export competitiveness, export products to China frequently initiated anti-

dumping, countervailing and other lawsuits, the abuse of trade remedy measures,Impose carbontariffs seek to regain their trade protection policy. Despite the constraints of WTO and other

multilateral institutions, and will not have serious trade protectionism, but this will increase trade

friction, to adversely affect the development of China-EU trade.

In addition, exchange rate volatility also increases the risk of trade, whether it is sovereign debt

crisis of the EU aid too much money to market, depreciation of the euro initiative, or to achieve

the EU trade balance and reduce trade deficit with China in mind, the appreciation of RMB pressure

will result in greater volatility in the exchange rate of RMB and the euro, so that importers and

exporters of expected future earnings uncertainty increases, affecting the development of China-

EU trade.

Looking ahead, while the development of China-EU trade will not be easy, but with China and the

EU as the world has a wide influence on the economy, both economic structure of highly

complementary, strengthening trade cooperation, resolve differences and friction on both sides

with great interest the development of China-EU trade prospects to look forward to

The failure of austerity and pretence



A rescue must do four things fast. First, it must make clear which of Europe¶s

governments are deemed illiquid and which are insolvent, giving unlimited backing to the

solvent governments but restructuring the debt of those that can never repay it. Second,

it has to shore up Europe¶s banks to ensure they can withstand a sovereign default.

Third, it needs to shift the euro zone¶s macroeconomic policy from its obsession with

budget-cutting towards an agenda for growth. And finally, it must start the process of designing a new system to stop such a mess ever being created again

SO GRAVE, so menacing, so unstoppable has the euro crisis become that even rescue

talk only fuels ever-rising panic. Investors have sniffed out that Europe¶s leaders seem

unwilling ever to do enough. Yet unless politicians act fast to persuade the world that

their desire to preserve the euro is greater than the markets¶ ability to bet against it, the

single currency faces ruin. As credit lines gum up and outsiders plead for action, it is not

just the euro that is at risk, but the future of the European Union and the health of the

world economy.

It is a sobering thought that so much depends on the leadership of squabbling European

politicians who still consistently underestimate what confronts them (see article). But the

only way to stop the downward spiral now is an act of supreme collective will by euro-

zone governments to erect a barrage of financial measures to stave off the crisis and put

the governance of the euro on a sounder footing.

In this section

y »How to save the euro

y Justice delayed

y Good fences

y Out with the old Reprints

Related topics

y Political policy

y Financial rescue plans

y Economic policy

y Domestic policy

y Germany

The costs will be large. Few people, least of all this newspaper, want either vast

intervention in financial markets or a big shift of national sovereignty to Europe. Nor do

many welcome a bigger divide between the 17 countries of the euro zone and the EU¶s

remaining ten. It is just that the alternatives are far worse. That is the blunt truth that

Germany¶s Angela Merkel, in particular, urgently needs to explain to her people.

The failure of austerity and pretence

A rescue must do four things fast. First, it must make clear which of Europe¶s

governments are deemed illiquid and which are insolvent, giving unlimited backing to the

solvent governments but restructuring the debt of those that can never repay it. Second,

it has to shore up Europe¶s banks to ensure they can withstand a sovereign default.

Third, it needs to shift the euro zone¶s macroeconomic policy from its obsession with



budget-cutting towards an agenda for growth. And finally, it must start the process of

designing a new system to stop such a mess ever being created again.

The fourth part will take a long time to complete: it will involve new treaties and

approval by parliaments and voters. The others need to be decided on speedily (say over

a weekend, when the markets are shut) with the clear aim that European governments

and the European Central Bank (ECB) act together to end today¶s vicious circle of panic,

in which the weakness of government finances, the fragility of banks and worries about

low growth all feed on each other.

So far the euro zone¶s response has relied too much on two things: austerity and

pretence. Sharply cutting budget deficits has been the priority²hence the tax rises and

spending cuts. But this collectively huge fiscal contraction is self-defeating. By driving

enfeebled economies into recession it only increases worries about both government

debts and European banks (see article). And mere budget-cutting does not deal with the

real cause of the mess, which is a loss of credibility.

Italy and Spain are under attack not because their finances have suddenly deteriorated,

but because investors fret that they may be forced to default. For this loss of confidence,

blame the pretence. Europe¶s leaders have repeatedly denied that Greece is insolvent

(when everyone knows it is), failing to draw a line between it and the likes of Spain and

Italy, which are solvent but short of liquidity. The excuse is that a Greek restructuring

may cause contagion. In fact denying the inevitable has undermined pledges about

solvent governments.

Instead of austerity and pretence, a credible rescue should start with growth and, where

it is unavoidable, a serious restructuring of debt. Europe must make an honest judgment

about which side of the line countries are on. Greece, which is unambiguously insolvent,

ought to have a hard but orderly write-down. The latest, inadequate plan for a second

Greek bail-out, agreed at a summit in July, should be thrown away and rewritten. But allthe other euro members (and on present numbers Portugal is just about in the solvent

camp) should be defended with overwhelming financial firepower. All the troubled

economies, solvent or insolvent, need a renewed programme of structural reform and

liberalisation. Freeing up services and professions, privatising companies, cutting

bureaucracy and delaying retirement will create conditions for renewed growth²and that

is the best way to reduce debts.

How to prevent contagion? A Greek default would threaten many banks, not just in

Greece: this week the markets took aim at French banks that hold southern European

debt. Moreover, solvent countries need a breathing-space to push through reforms. That

points to agreeing to two measures at the same time: a scheme to shore up the banks,which may take months to put into practice, and a rock-solid promise to support solvent

governments, which has to be immediate.

The recapitalisation of Europe¶s banks must be based on proper stress tests (which

should this time include possible default on Greek sovereign debts). Some banks may be

able to raise money in the equity markets, but the most vulnerable will need government

help. Core countries like Germany and the Netherlands have enough cash to look after

their own banks, but peripheral governments may need euro-zone money. Ideally that



would come from the European Financial Stability Facility (EFSF), whose overhaul was

the most useful thing to emerge from the July summit. But it also makes sense to set up

a euro-zone bank fund, together with a euro-zone bank-resolution authority. That is part

of the longer-term institution building. However, the ECB could help the banks by giving

a commitment to provide unlimited liquidity for as long as it is required, rather than a

rolling six months, as now.

The great firewall of Europe

None of this will work unless the Europeans create a firewall around the solvent

governments. That means shoring up euro-zone sovereign debt. Spain and Italy owe

¼2.5 trillion. What if the markets suddenly took fright over Belgium or France? Some

have argued for a system of Eurobonds in which every country¶s debt is backed by all.

But the political oversight to ensure that high-spending countries do not fritter away

other people¶s money would take years to sort out²and one thing the euro zone does

not have is time. The answer is to turn to the only institution that can credibly counter a

collective loss of confidence on such a scale.

The ECB must declare that it stands behind all solvent countries¶ sovereign debts and

that it is ready to use unlimited resources to ward off market panic. That is consistent

with the ECB¶s goal to ensure price and financial stability for the euro zone as a whole.

So long as governments are solvent and the bank sells the bonds back to the market

after the crisis, this does not amount to monetising government debt. In today¶s

recessionary world, the ECB could buy several trillion euros-worth of bonds without

unleashing inflation.

Even so, this is a huge step. The ECB¶s German officials have taken to resigning in

protest at the limited bond-buying undertaken so far. They fear not only that so young

an institution is vulnerable to a loss of credibility, but also that the ECB, which is

independent but unelected, could become embroiled in political decisions²especially bydeclaring a state insolvent and cutting it off. Both these longer-term risks are real, but

they are far outweighed by the need to stop the rot. It would be a nonsense if the ECB¶s

dogged defence of monetary rigour led, say, to an Italian default and a global

depression.

A bad deal or a much worse one?

Put our plan to many Europeans²creditor Germans, debtor Greeks or Eurosceptic

Britons²and they may moan that this is not what they were promised when the euro

was set up. Completely true, and sadly irrelevant. The issue now is not whether the euro

was mis-sold or whether it was a terrible idea in the first place; it is whether it is worth

saving. Would it be cheaper to break it up now? And are the longer-term political costsof redesigning Europe to save the euro too great?

The sobering truth about the single currency is that getting in is a lot easier than getting

out again. Legally, the euro has no exit clause. If Greece stormed out, and damn the

law, as it might yet have to do, it would suffer a run on its banks, as depositors withdrew

euros before they were forcibly converted into devalued new drachma. It would have to

impose capital controls. Greek companies with international bills would risk bankruptcy,

as they would suddenly be without the cash to cover them; and the pressure on other



wobbly countries would increase. That is why we favour restructuring Greece, but letting

it stay in the euro.

If, on the other hand, a strong country like Germany walked out of the euro, probably

taking other strong countries with it, the result would be just as terrible. The new hard

currency would soar, hitting German exporters. Turmoil in the rump of the euro zone

would batter export markets just as the north¶s firms became less competitive. German

banks and companies, in a mirror image of what would happen in Greece, would suffer

from the sudden devaluation of euro assets outside the new hard-currency zone. And the

rump might still break apart, as Italy or Spain would not want anything to do with

Greece. Amid the debris of broken treaties, wild currency swings and bitter

recriminations, Europe¶s single market could collapse and the EU itself²the rock of the

continent¶s post-war stability²could start to crumble.

Attaching hard numbers to any of this is difficult. Analysts at UBS, a bank, reckon that

euro break-up could cost a peripheral country 40-50% of GDP in the first year, and a

core country 20-25% (see article). Yes, that is a guess (as are the various estimates for

the ongoing costs of break-up and those of a bail-out in future years). But the immediate

bill for a break-up of the single currency would surely be in the trillions of euros. By

contrast, a successful rescue would seem a bargain. Add together the money already

spent on rescues, to what is needed to recapitalise European banks and any potential

losses to the ECB, and the total will still only be in the hundreds of billions of euros. If

the ECB¶s intervention is bold and credible it might not even have to buy that much debt,

because investors would step in. In short, the euro zone would be reckless to flirt with

collapse when an affordable rescue is possible.

German taxpayers might accept that the immediate costs of our rescue plan are smaller

than break-up. But what they detest is the idea that it might let feckless Italians and

Portuguese off the hook. Safe in the knowledge that the ECB stands behind their bonds,

they may shy away from reform and rectitude.

Two risks flow from this. The immediate (and real) one is that furious Germans will

demand that Greece is thrown out (or bullied out) of the euro to frighten the others.

Such a horrific event would indeed scare Portugal and Ireland, but a threat to expel Italy

or Spain is empty: they are too big and too tightly tied into the EU. Simply chucking out

Greece because it was convenient would permanently undermine the security of small

members of the EU. Besides, once Greece defaults and restructures, its economy stands

a good chance of making a credible start on its long journey to economic health.

The longer-term risk has to do with ³more Europe´. Fans of political integration say that

the only way to enforce discipline is to create a United States of Europe (seeCharlemagne). Perhaps a fiscal union that would supervise the issuance of common

Eurobonds? Or a new supervisory role for euro-zone governments, or, heaven forbid, the

useless European Parliament? Somewhere behind this also looms the idea that the ins

will now be able to boss around the outs. The ten countries, including Sweden, Poland

and Britain, that kept their own currencies may face a choice: to join the euro or be

excluded from a new ³core Europe´, which in effect starts setting policies. And, this



being Europe, there is every chance that the politicians will try to avoid discussing a lot

of this with their electorates.

Explore our interactive guide to Europe's troubled

economies

The Economist concedes that our rescue plan begins with a democratic deficit that needs

to be fixed if steps towards closer fiscal union are to work. But there must be ways for

good governments to force bad ones to keep in line that do not require the building of a

huge new federal superstate. The Dutch have suggested a commissioner in Brussels with

power to veto countries¶ fiscal excesses, and to impose his judgments by law. Mrs Merkelhas talked of giving the European Court of Justice the right to impose good behaviour.

These are big steps²make no mistake²and because they involve treaty changes they

would have to be sold to voters. But they are a long way short of a United States of

Europe.

Mrs Merkel, it¶s time to explain the choices

The outs, in particular, may still be nervous about all this. So frankly is this newspaper.

But the alternative may be the collapse of not just the single currency but the single

market and the whole European project. The euro has reached the point where nobody is

going to get what they want²something that needs to be spelled out to the Germans

more than anybody. Over the past 18 months they have grudgingly supported half-

rescue after half-rescue²and the bill has gone up. In the end confidence and credibility

are all. For the ECB to stand behind less prudent countries may be unwelcome to

Germans; but letting the euro fall to bits is much, much worse. Spell that out clearly to

your voters, Mrs Merkel.

In the next few weeks we are sure to see the market¶s intelligent side at fore as it closely scrutinizes EU¶s

endeavors to rescue Italy.

If the former is unimpressed then the fools shall be back again with a sell-off, this time at a much larger scale.

Does EU have a chance to prevent that? I give my 2 cents.

Italy is Europe's fourth largest economy and has more than US$ 2 trillion in debt.

Going by the sizes of EU¶s previous bailouts for Greece & Co. along with the growing discontent among EU

peripherals (especially Germany), it is highly unlikely that Eurozone can put together a bailout sufficiently large

enough to comfort the markets and rescue Italy (even though they have started buying Spanish and Italian bonds

from the secondary market).



After seeing the downgrade of US¶s credit rating, the core countries shall be very conscious of the threat to their

own AAA ratings if they over-stretch in their commitment to the bailout. Lehman Brothers were considered

µToo Big to Fail¶; I feel that Italy can be aptly called µToo Big to Save¶. If they go down like other failed

peripheral economies, it would be reasonable to expect Spain will probably follow too, which would certainly

trigger a chain reaction across the global financial markets. Along with markets deeply in red and rock bottom

consumer sentiments, the financial Armageddon is almost certain to cause the breakup of the Euro.

So what are the options in front of European lawmakers (many of whom are surprisingly on vacation at this point in time) to send positive signals to a very jittery global market whose nerves have already been freckled to

the limit by the debt issues and recovery concerns in US over the last few days ? I see only two ways (Warning:

None of these are going to make German Chancellor Angela Merkel any happier)

1. Breakup of the Euro: There are two Eurozones in European Union. The core countries led by Germany and

France and the peripherals like Greece, Portugal, and Spain etc. The former are on various degrees of

growth trajectories while the latter are in all sorts of fiscal mess with almost stagnant growth rates. Having

their own currencies shall enable the peripheral nations to devalue their way out of trouble which is a

luxury an appreciating Euro doesn¶t allow them. The breakup of the Euro can be done in one of two ways:

(i) Each country goes back to their own currency (Germany to Deutschemark, Italy to Lira etc.) or (ii) the

core nations have one currency while the peripherals have another (say Euro 1 and Euro 2). Either ways,

the ability to manage their currency in accordance with their economic metrics shall lead to growth of the

currently stagnant EU member nations in the long run.2. Issuance of Eurobonds: A look at the spreads at which Spanish and Italian bonds are trading at the moment

would show that unsustainably high borrowing costs these nations face if these countries go to the markets

to raise more debt. At the same time, as I mentioned earlier, the EU can¶t put together a bailout that can get

Italy out of its troubles. Issuance of Eurobonds can solve both these problems. As an MBA student, the

definition of Eurobond I learnt in my class was µA bond issued in a currency other than the currency of the

country or market in which it is issued.¶ Clearly this term came into existence before Eurozone got created.

By Eurobonds here I mean ± Euro denominated bonds issued by ECB and guaranteed by all the

member nations (thereby spreading the credit risk around Eurozone). Due to the currency they are

denominated in and the underling support from the member nations, the market is likely to react positively

to them. In fact they might become the next µrisk-free rate benchmark¶ now that the US¶s credit rating has

been downgrading.

Needless to say, the core countries (especially Germany which has been firmly opposing this idea for a whilenow) shall not be happy and rightly so. It is like one guaranteeing her irresponsible and broke brother¶s debts

which shall not give him any incentive to mend his ways. The proposal is likely to spark and fierce political

debate and public protest in the core nations and shall be a tough one to get a consensus on.

While I don¶t rule out a breakup of the Euro before 2025, it would be a logistical nightmare and shall take EU

members years to get things systematically on track. That is something these countries can ill afford at this point

in time. More importantly the European lawmakers are too proud to admit that the creation of Eurozone based

on geographical proximity of nations instead of their fiscal metrics was a BIG MISTAK E and shall not let the

Euro break up until they are left with no other choice. Luckily for EU, they have a choice right now ± Option

No. 2, which would no doubt be tough to table but is their only way to go if they want to prevent a global

meltdown and more importantly (from their standpoint), be around for the next few years.

This brings us to the obvious question ± terms offered on the Eurobonds. Well an issuance of such massive size

and offer terms (like multiple nations as guarantors) would be unprecedented in history and I might be

completely off here. even more so because there shall be many subjective factors that have to be taken in

account). Nevertheless I make a brave attempt.

Issuer: European Central Bank

Security: Guaranteed by EU sovereigns



R anking: Senior Secured

Issue R atings: AAA/AAA/Aaa (S&P/Fitch/Moody¶s)

Issue Size: This number shall be a function of a lot of political and macroeconomic factors and can range from

anywhere from EUR 100 billion to EU 200 billion (maybe even more).

Maturity: 2022 and 2042 (10 years and 30 years). I expect a short-term and a long-term bond to be issuedtogether

Coupon: Around 4.75% for 10Y bond and around 6% for 30Y bonds (based on the AAA-rated Euro-

denominated bonds issued by EU sovereigns)

Bookrunners: Top European banks

K ey creditors: Everybody from Sovereign Wealth funds to Pension funds & Endowment funds to top banks of

various countries to hedge funds to H NI clients of Private Banks shall be vying to get a piece of the offerings.

China would probably sink its teeth into a major chunk as the country shall look to diversify its investments

away from both the US and the dollar. Middle Eastern countries too shall try to stack up as much as they can

using their petro dollars (through their SWFs) as they look to become µcreditors of Europe¶. For them this move

would have more political and diplomatic significance than economic rationale. Needless to say that in such a

high stakes game the book building by the bookrunners shall be extremely important which is why I expect top

European Banks to be at the helm of this massive task.

In addition to bailing out struggling EU peripheral, the Eurobonds shall have the following positive effects for

Eurozone:-

y The core countries won¶t have to dig into their pockets to aid Europe¶s sick children. This shall be good

news for their fiscal balance sheets and consequently for their credit ratings.

y As the Eurobond shall be denominated in Euro, the currency shall experience sharp appreciation on issue

subscription and can strongly put up its case for the position of global reserve currency in front of a world

which is searching for an alternative to the US dollar.

However, if the peripheral EU countries aren¶t able to implement strict fiscal measures and set their house in

order, then this step won¶t be of much help in the long term. These Eurobonds can buy EU time and prevent it

from disintegrating in the short run, but it won¶t be able to stop the inevitable if the peripherals don¶t start pulling their weight before the end of this decade. Can they do that? I am not so sure but I hope they prove me

wrong.

R ead more: http://articles.businessinsider.com/2011-08-15/europe/30089302_1_markets-italian-bonds-

currency/2#ixzz1ZSIxFK 00

R ead more: http://articles.businessinsider.com/2011-08-15/europe/30089302_1_markets-italian-bonds-

currency#ixzz1ZSH0FlnC

Will China Allow European Union to Fall

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