The Future of the EU and Sino-EU Relations

Feng Zhongping The Future of the EU and Sino-EU Relations Feng Zhongping* ince the end of 009, sovereign debt crises have erupted one after the Sother in Greece, Ireland, Portugal and Spain. Until now, the EU has not been able to keep this run of debt crises in check. Anxieties over the future of the European Union and the eurozone are mounting. American historian Walter Laquer has argued that economic decline, diplomatic weakness, and internal tensions could lead to the collapse of the EU. Philip Stephens, columnist for the Financial Times, wrote: At the opening of the millennium the European Union seemed a confident role model. The assumption was that the postmodern multilateralism symbolized by the euro would be exported to rising nations and regions. Now there are questions as to whether Europe itself can hold together. This paper aims to understand the current situation and the future of the EU by examining the European sovereign debt crisis and its socio-political impact on European integration. It also analyzes the reasons behind the worsening of the debt crisis, the future of European integration, and China s policy toward Europe. I Two questions are frequently raised concerning the European debt crisis. The first: since Greece overcame several debt crises in the 980s, * Feng Zhongping is a Research Professor and Assistant President of the China Institutes of Contemporary International Relations (CICIR). His research focuses on European politics and China s foreign policy. Walter Laquer, Kontinent in der Krise: Das Ende der Euro-Zone naht und auch das der EU, Die Welt, June 7, 0, Web. August 7, 0, <http://www.welt.de/ kultur/article066735/>. Philip Stephens, The US can learn to deal with chaos, The Financial Times, February 9, 0, Web. 7 August 0, <http://www.ft.com/intl/cms/s// efc0390-5964-e-953-0044feabdc0.html#axzz4qxzbh5r/>. CIR Vol. No. 6

The Future of the EU and Sino-EU Relations why has it taken Athens so long to start fixing things? The second: the U.S. and Japan have much higher debt ratios than the eurozone so why haven t these two also suffered debt crises? The answers lie largely in the structural defects of the European Monetary Union (EMU). Felipe González, former Spanish Prime Minister, used to employ an analogy when he was explaining the benefit of joining the EU to the Spanish people: a good house in a bad neighborhood is less attractive to the market than a bad house in a good neighborhood. Obviously, Mr. González was not aware of the downside of being in the eurozone. Before joining the eurozone, Greece was able to boost exports via currency devaluation when it was faced with a debt crisis; but now, with no currency of its own, Greece can no longer do this. On average, the debt ratios of the eurozone countries are lower than that of the U.S. or Japan. However, the eurozone is a currency union, and not a fiscal one. There is a European Central Bank (ECB), but no European Treasury. In other words, even though Greece and Germany use the same currency, the two are two separate sovereign states. There is no fiscal transfer between EU member states, because the EU is not a unified country. The three-year fight against the debt crisis illustrated the difficulty for different sovereign states to share the common risk of debt. German Chancellor Angela Merkel has vowed: No Euro bonds as long as I live. Due to the same structural defect, the ECB cannot resort to quantitative easing as a momentary policy, unlike the U.S. Federal Reserve. There is an increasing belief that the euro is a premature child, born at a time when many European countries were not prepared for its birth. Indeed, the birth of the euro was driven by political calculations. The Maastricht Treaty, which first laid out the idea of an EMU, came out of the fall of the Berlin Wall and the end of the Cold War. Many European González: the EU model can continue, but change is needed, Web. 7 August 0, <http://www.cetin.net.cn/cetin/servlet/cetin/action/htmldocumentaction?baseid= &docno=3733/>. The Coming EU Summit Clash: Merkel Vows No Euro Bonds as Long as I Live, Die Spiegel, June 7, 0, Web. 7 August 0, <http://www.spiegel.de/ international/europe/chancellor-merkel-vows-no-euro-bonds-as-long-as-she-lives-a- 8463.html/>. CIR November/December 0 3

Feng Zhongping countries, led by France, were worried about the threat from a unified Germany and tried to mesh it into an EMU, making a European Germany, instead of a German Europe. The Germans, on the other hand, regarded their Deutsche Mark as a symbol of economic strength and stable prices and were reluctant to give it up. Germany made European political union a precondition of joining the EMU. France threatened Germany that if it did not join the EMU, it would object to Germany s reunification so Germany was forced to compromise. And thus the euro was born with all its defects. When European politicians first decided to launch the EMU in 999, the EU had not yet met the criteria for an optimal currency area. Economists believed these criteria were important for a successful unified currency. Worse still, in the decades after the launch of the euro, the disparity in competitiveness between Northern and Southern Europe grew, leading to an increasingly serious economic imbalance within the eurozone. Second, although the EU said it would speed up political integration along with the establishment of the EMU, real political union is still not in sight. The importance of building a political union has been recognized in the aftermath of the current debt crisis. Chancellor Merkel has repeatedly said that the primary solution is to pool fiscal sovereignty and build a strong political union. Former German Chancellor Gerhard Schroeder also said that the crisis was an opportunity for building a real European political union. He suggested that the European Commission should be transformed into a European government which would be supervised by the European Parliament, establishing a United States of Europe. The Future of Europe Group, which was started by German Foreign Minister Guido Westerwelle, published a report on June 9, 0, explicitly calling for an Germany s Chancellor Merkel Urges EU Political Union, BBC, June 7, 0, Web. 8 August 0, <http://www.bbc.co.uk/news/world-europe-8350977/>. Spiegel Interview with Gerhard Schroder: Europe Needs to Wake Up, Die Spiegel, May 9, 0, Web. 8 August 0, <http://www.spiegel.de/international/ europe/spiegel-interview-with-gerhard-schroeder-europe-needs-to-wake-up-a-784357. html/>. 4 CIR Vol. No. 6

The Future of the EU and Sino-EU Relations upgrade of the EU into a federal state. However, a breakthrough for a political union is still not in sight because the political forces which would be behind such a breakthrough have not gained enough momentum. The European debt crisis will linger as long as the intrinsic defects of the eurozone remain. The counter-crisis measures that the EU and the eurozone have adopted so far fall into two categories: first are those targeted at the symptoms, while the second are those targeted at fundamentals. Even a combination of these two is simply a quick fix. The first category can be regarded as a first-aid treatment, injecting blood to the debt-ridden countries and saving them from default or bankruptcy. The so-called Troika (the EU, the ECB and the International Monetary Fund), has provided loans to Greece, Ireland and Portugal. Such measures were first carried out through the European Financial Stability Facility (EFSF), a temporary aid instrument that was launched May 00 and will remain in force until June 03. Later, the EU decided to build a permanent mechanism, the European Stability Mechanism (ESM), which runs in parallel with the EFSF and has increased loan capacity to 700 billion euro. The second category (the measures targeted at fundamentals) refers to those measures bolstering eurozone governance, preventing the recurrence of a debt crisis through better institutions. In October 8-9, 00, the EU passed an economic governance reform plan to strengthen fiscal discipline, build a macro-economic risk monitoring mechanism, enhance economic policy coordination and build a permanent crisis mechanism. This was the biggest ever eurozone governance reform and it has already seen some results. First, in March 0, the Treaty on Stability, Coordination and Governance in the EMU (TSCG), usually referred to as the Fiscal Compact, was signed by 5 EU countries (all member states except for Britain and the Czech Republic). This intergovernmental treaty imposes fiscal discipline, or caps Stephen Evans, More Europe! : Germany s battle-cry for the eurozone, BBC News, Jun 0, Web. 8 October 0, <www.bbc.co.uk/news/world-europe- 8557059/>. CIR November/December 0 5

Feng Zhongping on financial deficit and public debt, on member state governments. Second, during the summer summit of 0, in order to break the vicious debt circle between banks and sovereign states, European leaders agreed that the ESM could recapitalize banks directly and be used to stabilize markets for member states; and a single supervisory mechanism involving the ECB would be built by the end of 0. This move was welcomed by the IMF as the right step toward monetary union. However, these achievements are long-term solutions and cannot eradicate the debt crisis immediately. Another reason why it is taking a long time to tame the debt crisis is that in the debt-ridden countries, structural reforms are torturous and the economic outlook is grim. Since the debt crisis, Germany has been imposing austerity measures on Greece and other southern European countries. Since austerity measures have failed to bring quick results, they backfire in countries such as France and Italy. Francois Hollande won the French presidential election in May 0 by promising to slash austerity measures. The EU Commission and the IMF predicted that in 0, EU economic growth will be flat, while the eurozone economy will contract by 0.3 percent. After a tug of war, new consensus between France, Germany, Italy, Spain and other key European countries has emerged to replace the Merkozy (Merkel plus Sarkozy) austerity consensus. This new consensus stresses the equal importance of austerity measures, reform and growth. The 0 billion euro stimulus plan passed at the EU summer summit 0 According to the fiscal compact, the Court of Justice of the European Union has the right to impose on those member states whose structural deficit has exceeded 0.5% of gross domestic product a lump sum or a penalty payment not exceed 0. % of its gross domestic product. The amounts imposed on a eurozone country shall be payable to the European Stability Mechanism. In other cases, payments shall be made to the general budget of the European Union. See The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, European Council, March, 0, Web. 9 August 0, <http://european-council.europa.eu/media/63935/ st00tscg6_en.pdf/>. 世界经济风云之欧洲篇 : 债务危机拖累经济增长, 新华社布鲁塞尔 0 年 6 月 6 日电,http://news.xinhuanet.com/world/0-06/7/c_336.htm; 全球经济恐再走下坡路, 新华社华盛顿 0 年 7 月 6 日电,Web. 9 August 0, <http:// news.xinhuanet.com/fortune/0-07/7/c_454504.htm/>. 6 CIR Vol. No. 6

The Future of the EU and Sino-EU Relations came out of this new consensus. Meanwhile, public opinion has changed too. Inside Greece and other debt-ridden countries, public opinion has come round to the view that the loss of competitiveness is behind slow, if not negative, economic growth; thus structural reforms including labor market reforms and investment environment improvements are necessary to turn the tide. Reforms have been carried out in southern Europe despite resistance, although due to the entrenchment of the competitiveness problem, reforms will not succeed overnight. II The political and social situations have undergone tremendous changes in Europe since the international financial crisis, especially since the European debt crisis. First, social discontent is rising; protests and riots have become commonplace. Even before the troubles started, a weak economy and rampant unemployment had sparked social tensions. The media blamed economic globalization for Europe s difficulties. They accused the new members from Central Europe and emerging countries such as China and India of stealing jobs from European workers. In recent years, demonstrations and strikes against tax increases and austerity measures have hit Greece, Spain and Britain. In August 0, a major riot in London spread northward to a dozen British cities. During the five days of riots, nearly 4,000 people were arrested and half of them were prosecuted. Second, ruling parties are facing severe criticism, and faltering one after another. In European politics, it has been a norm for two leading parties to take turns to rule. In the 990s, the European governments were dominated by centre-left parties. But the Third Way, a proposal advocated by Tony Blair, Gerhard Schroeder and Lionel Jospin has seen its heyday. Before 008, when the global financial crisis was just beginning, most European countries had voted in rightist parties. The financial crisis was not, in the end, an opportunity for the Left, as some had expected. On the Gang Members Were Minority in English Riots, International Herald Tribune, October 5, 0. In 000, there are countries ruled by social democrats; in 008, only three. CIR November/December 0 7

Feng Zhongping contrary, most voters believed the Right was better able to handle the economy. But as the debt crisis worsened, the economy in southern Europe stumbled, and as the harsh austerity measures caused unemployment (especially for the young) the electorates abandoned all ruling parties, whatever their political position. Since June 00, ruling parties in the Netherlands, Slovakia, Belgium, Ireland, Finland, Portugal, Greece, Italy, Spain and France have all lost power. Technical governments took over Greece and Italy before elections. Financial Times columnist Tony Barber said that Europe is facing a crisis of legitimacy. Third, political extremist parties have become a more serious challenge, with the strong emergence of parties and organizations from the far right. In the first round of the French presidential election in May 0, both the moderate-right candidate Nicolas Sarkozy and the moderate-left candidate Francois Hollande got less than 30% of votes, while the far-right candidate Marine Le Pen and the far-left candidate Jean-Luc Melenchon garnered more votes than their predecessors. In the 009 European Parliamentary elections, far right parties from Britain, Denmark, Hungary, Slovakia, Romania, Bulgaria, Austria and the Netherlands won seats. Some far-right parties actually won power because mainstream parties did not win a majority vote. Anti-immigration sentiment (especially directed against Muslim immigrants) has helped the far right in Europe. Thomas Klau from the European Council on Foreign Relations (ECFR) argues that: As anti-semitism was a unifying factor for far-right parties in the 90s, 0s and 30s, Islamophobia has become the unifying factor in the early The European Commission report in early 0 shows that in the fourth quarter of 00 the unemployment rate in 7 Member States reached a record height of 9.8%. Unemployment rate among the young is as high as 5%. In Spain, where the prospect for employment is particularly grim, nearly half of the young are out of work. See 报告显示去年第四季度欧盟失业率达 9.8%, 新华网,0 年 月 日, Web. 30 August 0, <http://news.xinhuanet.com/world/0-0//c_ 56774.htm/>. Tony Barber, Europe must confront crisis of legitimacy, The Financial Times, 3 April 0, web. August 30, 0, <http://www.ft.com/cms/s/0/4ec793c-8d50- e-8b49-0044feab49a.html/>. 8 CIR Vol. No. 6

The Future of the EU and Sino-EU Relations decades of the st Century. It is worth noting that anti-immigrant sentiment is not only spurred by economic hardship or high unemployment, but it was also encouraged by the anti-terrorism policies across the Atlantic after the 9/ attacks. Fourth, the rise of populism has haunted multi-culturalism in Europe. As extremist ideas gather momentum and extreme political forces grow stronger, populism and nationalism have risen in Europe. A 0 report by Demos, a British think tank, argued that an aggressive form of nationalism was growing among Europe s youth. Herman van Rompuy, President of the European Council, admits that populism is taking root in the political landscape. 3 Faced with the rise of populism and anti-immigration sentiment, German Chancellor Angela Merkel and British Prime Minister David Cameron have said that multiculturalism is under threat; Merkel even said that German multiculturalism has utterly failed. 4 Olivier Bailly, spokesman for the European Commission president Jose Manuel Barroso, warned: We must be careful about the populist threat and the spreading of its ideas because they are fundamentally opposed to the ideas of the European project. 5 In summary, Europe will not be able to completely recover from the debt crisis and restart growth in a short time. Europeans will have to face painful austerity measures and reforms in the years ahead. Tension and conflict, fed by discontent, will continue to define Europe s socio-political Peter Walker and Matthew Taylor, Far right on rise in Europe, says report, The Guardian, November 6, 0, Web. 30 August 0, <http://www.guardian.co.uk/ world/0/nov/06/far-right-rise-europe-report/>. This report also finds that, anti-immigrant and Islamophobic parties have spread beyond France, Italy and Austria, their traditional strongholds, to more open-minded Holland and Scandinavia. Peter Walker and Matthew Taylor, Far right on rise in Europe, says report. 3 欧洲理事会常任主席说欧中合作符合双方利益, 新华社布鲁塞尔 0 年 5 月 5 日电,Web. 30 August 0, <http://www.gov.cn/jrzg/0-05/6/content_ 864499.htm/>. 4 Angela Merkel: German multiculturalism has utterly failed, The Guardian, October 7, 00, Web. 30 August 0, <http://www.guardian.co.uk/world/00/ oct/7/angela-merkel-german-multiculturalism-failed/>. 5 French far-right electoral success worrisome: Europe, AFP, April 3, 0, Web. 30 August 0, <http://english.al-akhbar.com/node/6497/>. CIR November/December 0 9

Feng Zhongping landscape for some time to come. III Over the past six decades since the end of the Second World War, the integration process embodied by the EU and its predecessor, the European Community, has had the most profound repercussions in Europe. Peace, stability and development in today s Europe, as well the euro and the each nation s presence on the world stage owe their existence to this integration. Thus Europe s power is tied up in its integration. That is why everyone is now questioning the future of this integration faced with a simmering debt crisis. In general, two points can be made about the prospects for European integration. First, the integration process will not be reversed. The eurozone will not collapse and eurozone countries will advance as they battle with their economic troubles. Second, a two-speed Europe, one where different member states progress at different speeds in the integration dynamic, will emerge. The debt crisis has impeded the integration process. However, France, Germany and other major European powers have reached a consensus that European integration has come to a make-or-break point: If the integration process does not move forward now, it will slide back to a point where the euro may collapse. They reached this consensus because most economists believe that the consequences of a eurozone collapse will seriously hurt every member state. German magazine Der Spiegel quoted an analyst saying that if Greece abandons the euro, losses in the eurozone would amount to about 60 billion, while the loss for Germany alone would be around 70 to 80 billion. Nikos Ventouris, an economist at Greek think tank Foundation for Economic and Industrial Research (IOBE), said he believed that if Greece left the eurozone, its real gross domestic product would contract by another % on top of the 0% contraction that had taken place over the past three years, and income per capita would 德刊解析希腊退出欧元区后果, 新华社柏林 0 年 5 月 4 日电,Web. 30 August 0, <http://news.xinhuanet.com/fortune/0-05/5/c_0340.htm/>. 0 CIR Vol. No. 6

The Future of the EU and Sino-EU Relations decrease by 55%. Second, Germany, the most likely savior, does not want the eurozone disbanded. As the save-greece-or-not debate in Germany continues, more and more Germans realize that the cost of a eurozone collapse is higher than maintaining the single currency, and they are increasingly aware of the importance of the eurozone to German prosperity. As Michael Lind, policy director of the economic growth program at the New America Foundation, puts it: Ironically, the creation of the euro as a common currency was supported by France and other neighbors of Germany as a way of ensuring Germany s subordination to European regional institutions. But the real beneficiary has been Germany, because their sacrifice of their own currencies deprives Germany s neighbors of one method currency devaluation for preventing their industries from being wiped out by German exports. Therefore, even though there is strong opposition against saving Greece inside Germany, in reality, Germany will not allow the eurozone to collapse. Last but not least, aside from the heavy economic cost, the collapse of the eurozone would threaten the EU and herald an unprecedented setback for European integration. Although there is a difference of opinion on how a political union should be built, member states agree that the achievements of integration should be protected. We can see this from recent statements from politicians. On July 6, 0, ECB President Mario Draghi said that the ECB will do whatever it takes to save the euro and to prevent the collapse of the eurozone. The next day, French President Hollande and German Chancellor Merkel issued a joint statement, saying that their countries were deeply committed to the integrity of the eurozone and they were determined to do everything to 希腊留在欧元区尚未 命悬一线, 新华社布鲁塞尔 0 年 8 月 4 日电,Web. 30 August 0, <http://finance.chinanews.com/fortune/0/08-4/40655.shtml/>. Michael Lind, The Post-Cold War Era Is Over, The Salon Website, July 4, 0, Web 30 August 0, <http://www.salon.com/0/07/03/the_post_cold_war_era_ is_over/>. CIR November/December 0

Feng Zhongping protect it. Euro Group President Jean-Claude Juncker warned that if Greece ditched the euro it would create a political crisis for the EU; so no one should doubt the collective political will of the 7 eurozone countries. In the make-or-break moment, the eurozone has been pushed toward governance reforms such as the Fiscal Compact and European integration has stumbled forward. We have reasons to believe that eurozone counties will join hands to keep the momentum going as long as is required. Meanwhile, closer integration in the eurozone will accelerate the formation of a two-speed Europe. In some sense, a two-speed Europe has been around for quite some while. For example, there is a divide between eurozone and non-eurozone countries. The Schengen Agreement which does away with border controls is accepted by some EU countries but not by all. The EU, however, does not encourage these kinds of differences between member states, because it is not in line with the solidarity spirit. The EU does not welcome ideas such as a two-speed Europe or core Europe. Unfortunately, as the reforms of eurozone governance take place, the gap between eurozone and non-eurozone countries will continue to grow and a two-speed Europe seems inevitable. Helle Thorning-Schmidt, Prime Minister of Denmark, a non-eurozone country, said she has had to accept the reality of a two-speed Europe. 3 Former French president Nicolas Sarkozy is considered to be the one individual who has talked the most explicitly about a two-speed Europe. He pointed out to French university students on November 8, 0 that the eurozone would integrate faster than the EU7 and a two-speed Geir Moulson, Germany, France: determined to protect eurozone, AP, Jul 7, 0, Web. 5 November 0, <http://finance.yahoo.com/news/germany-francedetermined-protect-eurozone-53347--finance.html/>. Jean-Jacques Mevel, Juncker: La zone euro est prête à agir avec la BCE? Le Figaro, July 9, 0, Web. 30 August 0, <http://www.lefigaro.fr/conjoncture/ 0/07/9/000-0079ARTFIG0053-juncker-la-zone-euro-est-prete-a-agiravec-la-bce.php/>. 3 Ezra Klein, Denmark s prime minister gives her perspective on the European crisis, The Washington Post, February 5, 0, Web. 30 August 0, <http:// www.washingtonpost.com/business/economy/a-qanda-with-denmarks-prime-minister/ 0/0/4/gIQAS0egYR_story.html/>. CIR Vol. No. 6

The Future of the EU and Sino-EU Relations Europe would be the future for Europe. It is worth noting that a two-speed Europe not only encompasses the divide between eurozone and non-eurozone countries, but also the rift between European economic integration and political integration. In contrast to the rapid development of economic integration, political integration has stagnated. This rift will persist for the next few years. Just after the Second World War, EU integration was driven by security and political concerns. There were several failed attempts before they realized that economic integration was the only viable approach, but politicians never gave up trying for political union. The 993 Maastricht Treaty was designed to promote political union as well as economic and monetary union. A treaty establishing a Constitution which was signed in 004 was the latest attempt by the EU to mend the political shortfall. But referendums in France and the Netherlands have scuppered any efforts to advance political union. Since then, the EU has been relying on adjusting treaties and building institutions to improve cooperation in foreign affairs and security among member states, for example, the 009 Lisbon Treaty. The debt crisis, however, has disrupted efforts at improving political integration. Not a single European politician has advanced an idea as inspiring and as grand as the one former German Foreign Minister Joschka Fischer gave in his speech on European Federation at Humboldt University in Berlin ten years ago. A 007 research report by the Center for Applied Policy Research at the University of Munich on EU prospects, predicted four scenarios. First, becoming a federation state; second, sliding back to a group of independent states; third, forming a core Europe; or, fourth, making cautious progress in small steps. The report concluded that the last scenario was the most likely. In summary, European integration will not be completely derailed, Sarkozy eyes two-speed future for Europe, Reuters, November 8, 0, Web. 30 August 0, <http://www.reuters.com/article/0//08/us-france-eurozone-idu STRE7A75PN008/>. Thomas Ludwig, Zukunftsszenarien Fur Die EU: Zerfall oder Supermacht, Handelsblatt, March 3, 007, Web. 30 August 0, <http://www.handelsblatt.com/ politik/international/zukunftsszenarien-fuer-die-eu-zerfall-oder-supermacht/78680. html/>. CIR November/December 0 3

Feng Zhongping but prospects for political union remain bleak. This article predicts that the EU will most likely move towards a combination of the third and fourth scenarios. IV The way in which China and the EU, two major global powers, view each other and deal with each other will have a profound impact on both themselves and other nations. With the EU weighed down by the severe debt crisis, China needs to consider how it now views the EU and how to develop Sino-EU relations. EU bashing has become popular after the debt crisis, especially with U.S. media and academics. Richard Haass, president of the Council on Foreign Relations and former Director of Policy Planning for the U.S. Department of State, said: Even before it began, Europe s moment as a major world power in the st Century looks to be over. For Chinese decision makers, it is important to adopt a sober and nuanced view of the EU s status in the international system and in the global power structure. After the end of the Second World War, Europe was no longer at the center of the world; major European powers all slid to become minor nations. But as mentioned earlier, after Europe launched its integration process, Europe could no longer be assessed on the merits of a single country or small group of countries; instead, it should be looked at as integrated dynamic. Secondly, as emerging countries grow wealthier and stronger, the relative decline of the EU is inevitable. The need to trim international aid, the beginning of an inward-looking foreign policy has made it less of a development model, and meant that the EU has even less of global clout since the debt crisis started. But it is worth noting that the debt crisis has not changed the EU s status as the world s biggest economy, the world s biggest common market, and the world s second largest currency area. These are the three pillars that have made the EU a pole in the international economic and monetary system. Third, it is useful to examine the Richard Haass, A waning Europe matters less to America, The Financial Times, May 3, 00, Web. 30 August 0, <http://www.ft.com/intl/cms/s/0/ 8069a4-5e5-df-853-0044feab49a.html#axzz50eA9iSf>. 4 CIR Vol. No. 6

The Future of the EU and Sino-EU Relations transatlantic relationship in assessing EU power. The EU and the U.S. are still closely bonded in terms of their common values and security needs. Nevertheless, U.S. attitude toward the European debt crisis, especially the American rating agencies pressure on the euro, has further demonstrated the intensity of transatlantic competition. Economic hardship has not pushed Europe closer to its traditional ally, the U.S.; on the contrary, the two have grown further apart. As the U.S. strategic focus moves eastward, this trend will become more apparent. Due to the importance of the EU to China s economic development (the EU is China s biggest trading partner, biggest export market and the most important technology source), China needs to soberly and strategically assess EU power. Meanwhile, China has to understand the severity and perennially of the difficulties the EU is facing, and actively address the economic and financial impact of the debt crisis on China. The impact so far can be seen in three areas. The first is trade. According to the Chinese customs, Chinese exports to Europe fell in the first half of 0, except for a short-lived rebound in May. The volume of exports in those six months was $63.06 billion, down by 0.8% compared to the same period a year earlier. The second is investment. In 0, actual investment from the EU in China reached $6.35 billion, 3.7% less than that of the previous year. It was the second time since the 008-009 global financial crisis that EU investment in China fell. The trend has continued into 0. According to the Chinese Ministry of Commerce, during the first five months of 0, actual investment from the 7 EU member states reached $.78 billion, plummeting 5.% from that previous year. The third is euro-denominated assets. It is estimated that currently 7% of Chinese foreign exchange reserves is euro-denominated. 3 If the euro depreciates, 中欧经贸合作面临挑战下半年仍将低谷徘徊, 中国新闻网,0 年 7 月 7 日, Web. 30 August 0, <http://finance.chinanews.com/cj/0/07-7/4063085. shtml/>. 中欧经贸合作面临挑战下半年仍将低谷徘徊, 中国新闻网,0 年 7 月 7 日, Web. 30 August 0, <http://finance.chinanews.com/cj/0/07-7/4063085. shtml/>. 3 沈建光 : 中国如何应对欧元区危机? 金融时报 中文网,0 年 6 月 日, Web. 30 August 0, <http://www.ftchinese.com/story/00044989/>. CIR November/December 0 5

Feng Zhongping then China s foreign exchange reserves may also fall. The European debt crisis has not only brought challenges to Sino-EU relations, but also opportunities. All European countries, be them debtors or creditors, new member states or original founders, have been positively engaging in economic cooperation with China. Economic issues, as usual, will dominate Sino-EU relations for quite some time. Therefore, China and the EU should stress their economic cooperation. First, China and the EU should capitalize their economic complementarities and boost mutual trade and investment. In recent years, Chinese and German leaders have vowed to double their trade within five years; Chinese and British leaders have made similar promises. That demonstrates the enormous potential of Sino-EU trade. Since the European debt crisis, Chinese investment in Europe has soared and become a new driving force in Sino-EU economic cooperation. Second, China and the EU should explore new ways to cooperate and expand their common interests. Sino-EU economic complementarity is largely derived from Chinese markets and labor complementing European technology. That is still the case. However, China needs to keep exploring new areas to cooperate with Europe, such as urbanization and other areas in which Sino-EU economic cooperation can help Chinese domestic development needs. Third, China should have a positive attitude when handling bilateral economic tensions. Without a doubt, growing cooperation between the world s largest two economies will also cause growing competition between China and the EU in their local markets as well as in third markets. Competition for economic interests will increasingly become a major source of Sino-EU tension. Everyone, after all, is after their own interests. With the advent of the European debt crisis, Europe and the U.S. both maneuvered to fight for their own currency. Northern and southern countries inside the EU have also constantly argued. China should therefore calmly analyze Sino-European trade disputes. The key point is to prevent escalation of conflicts and to stand firm against protectionism. Of course, the EU should also keep that in mind. As well as bilateral economic cooperation, China and Europe are increasingly aware of the necessity of cooperating on regional and global issues. As China rises and there are more global 6 CIR Vol. No. 6

The Future of the EU and Sino-EU Relations challenges, the EU and its major member states have very high expectations for China s role. China is also more willing to play a bigger role in the international arena. The lack of mutual political trust, nevertheless, is a barrier for cooperation. Thus both sides should make a special effort to conquer this lack of trust. The last two or three decades has shown that economic cooperation is pivotal to improving Sino-European political relations, but it has also shown that the former does not automatically guarantee the latter. China and Europe are not engaged in any disputes concerning core interests. Sino-European competition is not a strategic battle between an emerging and a status quo power. The factors hindering Sino-EU political trust are mainly differences in values, such as on human rights and democracy. Thanks to the solid record of Reform and Opening-up, European perception of China has changed profoundly. However, Europeans are still skeptical of and distrust China. Undoubtedly, nurturing political trust is a long-term task. For the sake of both sides interests and world peace and stability, China and Europe should be fully aware of the importance and urgency of this task. (translated by Huang Jing) CIR November/December 0 7