Why Europe is not free to relate to China?

December 8, 2023
Former Greek finance minister and professor of economics at the University of Athens.
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Hidden constraints harmful to the peoples of Europe and China

As the 24th EU-China Summit concluded on Thursday, it is natural to want to look behind the declarations and official speeches to identify the deeper forces shaping the European Union’s relationship with China and its policies toward China. But to understand the nature of these forces, it is crucial to go back to the very beginning, August 1971, when the United States ended the Bretton Woods international financial system designed by itself. The reason we need to go that far back in time is that the EU’s business model was shaped in response to that tumultuous transition from a fixed exchange rate system to the era of financialized capitalism. Similarly, China’s momentous rise, and its evolving links to Europe, need to be examined under the same light.

Under the Bretton Woods system, fixed exchange rates between European currencies and the dollar (i.e., Europe’s dollarization) worked well as long as the US maintained a trade surplus with the European countries and Japan — in the sense that the dollars pumped into Europe would migrate back to US soil — courtesy of US net exports to Europe. However, once the US became a deficit country, sometime in the late 1960s, Bretton Woods was no longer sustainable and was speedily replaced by what I call a Dark Deal that Washington surreptitiously offered Europe and Japan.

The Dark Deal was rather simple: “We shall keep demand for your products high, using our trade deficit. In return, you will voluntarily invest your profits in our FIRE — finance, insurance and real estate sectors.” Thus, the US dollar became a glorified IOU. The US could use it to buy more or less everything that Europe’s and Japan’s factories could produce, paying in dollars that European and Japanese capitalists had no alternative but to invest in the US’ FIRE.Why call this Dark Deal? Because, along with fabulous riches for US and European capitalists, it yielded permanent wage repression in net exporting countries, such as Germany, a slow burning recession in the rest of Europe, and a massive industrial decline in the heartlands of the US.

China’s momentous rise in the 1990s found the US and the EU in this strange relationship. China’s economy benefited from Washington’s Dark Deal which was now extended to export entire factory lines from the US to China, whose output would then be exported to the US, with US citizens paying for it in dollars that their Chinese recipients would then invest in Wall Street, for example, in US treasury bills. And what would Wall Street do with these savings? They would invest much of European, Japanese and Chinese profits into new capital equipment around the world. In short, the US recycled other people’s moneys and kept a significant portion of the resulting profits and rents.

This US-centered global recycling mechanism broke down in 2008 once and for all. What had happened was that, on the back of the billions of dollars of European and Asian profits rushing into Wall Street on a daily basis, the US and UK financiers built tsunamis of unsustainable bets (also called structured derivatives) which, inevitably, crashed and burned, first when Lehman Brothers collapsed and then in a vicious domino effect that brought down the entire North Atlantic and European banking system.

At that point, the West practiced universal austerity for the majority and huge money printing on behalf of finance and its Big Business clients. The result was a superb recovery for financial markets, but a collapse of productive capital investments (as business could see that the majority could not afford pricey new goods), depression for the West’s working class, soulcrushing levels of inequality, and the rise of the racist ultraright both in Europe and the US.

Two things saved Western capitalism: the Western central banks’ money printing already mentioned and … China. Immediately after Lehman’s collapse, the Chinese government wisely boosted investment to replace the anticipated loss of foreign demand with domestic investment. Thus, China was immunized from the Western financial crisis virus. In the process, China’s investment spree played a major role in stabilizing both the US and the problematic eurozone.

This is the historical background against which to understand the current relationship between China and the EU: The EU needs China much more than China needs the EU, but it is restrained by the US in its relationship with China. To see this, note that before the 2008 crisis hit Europe, emanating from Wall Street, the very foundations of the EU were faulty, for unlike the US, which has a Federal Treasury, a fully unified banking system and a federal aggregate investment program (which, of course, includes the large budget of its mighty military-industrial complex), Europe has none of that. As a result, after 2008, with Greece being the canary in the coal mine, as European populations were being immersed in harsh austerity, most European governments were allowed to sink into unpayable debt, leading to investment levels lower than the already low levels of the US and far lower than those of China.

Fifteen years later, we can see the results. In 2008, Europeans earned, in aggregate, 10 percent more than the US citizens. By 2022, the US citizens were earning 26 percent more than Europeans. Moreover, Europeans are becoming poorer not just collectively but also privately. What is worse is that for fifteen years, since 2009, Europe has failed to invest, unlike China or the US, into the technologies of the future: batteries, solar power, microchips and artificial intelligence. Most importantly, while the US and China have invested massively in the new cloud-based capital that grants its owners great power over the emerging nexus of Big Tech and digital financial transactions, Europe has not.

The above explains why Europe, despite its wealth and riches, is a fading economic bloc caught up in the mounting new Cold War that Washington has unleashed against China in order to stem the growth of China’s agglomeration of Big Tech and digital payment systems which pose a danger to the global dollar-based payments system. By adding an East-West divide to Europe’s existing North-South divide, and by boosting inordinately its energy costs, the crisis in Ukraine has diminished even further Europe’s autonomy to choose its own policies vis-a-vis China independently of the will of the US.

In conclusion, when the European and Chinese officials meet at the 24th EU-China Summit, Europe’s representatives will have far fewer degrees of freedom to choose their negotiating position than they once had. Europe is not what it used to be. And that is good for the peoples of neither Europe nor China.


Former Greek finance minister and professor of economics at the University of Athens.
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