Sep 15 2011
Not just another BRIC in the wall!
The geopolitics of the world is changing rapidly. Size of market is becoming more important. According to Brazilian government officials the BRICS nations, of Brazil, Russia, India, China and South Africa, will be meeting next week in Washington to coordinate a proposal to offer assistance to the European Union in overcoming its fiscal difficulties,
Not all BRICs are of the same size or importance, but in global terms there is none bigger nor more important than China. This is causing some huge challenges as well as opportunities for the European Union.
Concern has already been expressed in the European Parliament at China’s increasing monopoly in the production of rare metals. It has been reported that Beijing is to further tighten its stranglehold on the mining of rare earth metals essential for the manufacture of high-tech products from iPods to wind turbines and military missiles.
There is also concern that a Chinese solution to the Euro crisis could lend to further dependency on and compromise with the Chinese. Since the euro zone’s debt crisis erupted last year, the region’s governments have aimed to limit it to Greece, Ireland and Portugal, which have so far signed up to bailouts totalling almost €400 billion.
Spain and Italy have managed to keep their access to market funding under control through fiscal reforms.
But in recent weeks the situation has worsened. Due to the large size of the Spanish and Italian economies, pressure on the euro zone would increase dramatically if either country were to need financial assistance.
EU officials have avoided any talk of budget offenders like Greece being kicked out of the euro zone but the Netherlands put the unwanted question firmly back on the table with proposals to appoint a new ‘Commissioner for budgetary discipline’.
The European Commission strongly rejected the idea, saying neither exit nor expulsion from the euro zone is possible according to the Lisbon Treaty.
China has urged Europe’s leaders to prevent the euro zone debt mess from spreading, underlining international alarm over a crisis that is now threatening Italy, the zone’s third-biggest economy.
Chinese Premier Wen Jiabao said Beijing was willing to help its biggest trading partner, but added that Europe must stop the crisis from growing and reciprocate.
Investors are increasingly sceptical the debt debacle in the 17-nation currency area can be resolved. Credit markets are factoring in a 90% chance that Greece will default on its debts and they demanded the highest risk premium on Italian five-year bonds since the country joined the euro in 1999.
“What we have to take note of now is to prevent the sovereign debt crises from spreading and expanding further,” Wen said.
Wen didn’t specify what steps China, with more than $3 trillion in foreign exchange reserves, might take to help Europe. But a senior Brazilian source told Reuters that the BRICS group were in early talks on increasing their holdings of euro-denominated debt to help ease the crisis.
“We’ve said countless times that China is willing to give a helping hand and we’ll continue to invest there,” Wen said in a speech at a World Economic Forum event in China.
He suggested though that the EU would have to reciprocate Beijing help by moving to grant China ‘market economy’ status, which would lower its exposure in trade to anti-dumping cases. What else might China ask for in terms of tit for tat or Yuan for Euro?