On 26 October, during a 4am press conference in Brussels on the euro zone’s latest debt crisis, French President Nicolas Sarkozyannounced his plan to reach out to his Chinese counterpart Hu Jintao for help.
A day later, unmindful of the criticism of the plan, he did reach out and talk to Hu a few hours after a meetingof European leaders decided to increase the size of thebailout fund (the EuropeanFinancial Stability Facility)to $1.4 trillion (Rs69 trilliontoday).
A day later, Klaus Regling, head of the bailout fund, stoked fresh speculation about a Chinese intervention when he flew to Beijing for meetings with the country’s central bank and the finance ministry.
Hu Jintao, China’s President. Photo: Bloomberg
Though politicians in Europe sought to play down the import of the two developments, it’s clear that a desperate Europe is willing to go any distance to avoid a meltdown.
It is also significant that all this happened just a week ahead of the meeting ofthe Group of Twenty (G-20) nations in Cannes to discuss, among other things, increasing the role of the International Monetary Fund in addressing the European crisis.
The two-day summit—the high table of 20 countries that together account for 80% of global income—that kicks off on Thursday could well be the coming-out party for China, currently the world’s second largest economy, and with undisguised ambition to overhaul the $14 trillion US economy.
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The Chinese seem to be holding their cards close to the chest, although it is apparent that they will do whatever they need to do at Cannes to get structural gains that will help them reach their objective— economic supremacy.
That response may not go down well, with some of the countries instead seeking an explanation from China as to why the country isn’t fulfilling its multi-lateral obligations rather than seeking to maximize its own gains by playing outside the rules. For some time now, the chorus from across the Atlantic has been about China’s reluctance to contribute to the rebalancing of the global economy. (China and Germany are the twobig economies of the world with a surplus on the current account of balance of payments—that is, of goods, services and transfers; it was about 10% of gross domestic product three years ago. This is in contrast to countries such as the US and India, which have racked up sizeable current account deficits—domestic demand is so much in excess that it has to be met through external sources.) The Chinese don’t take well to such criticism and it will be interesting to see how they react to it at Cannes.
The meet itself is happening in an economic climate that is far from salubrious. The sharper recovery of some countries from the crisis of 2008 (indeed, in China, and, to some extent, in India, itwas almost like there wasn’t any real crisis) and the slower recovery of others has made global policy consensus hard to achieve. Greece’s contentious decision to seek a public referendum on an austerity package that was decided on after much deliberation with euro zone members is certain to be discussed at the meeting and it will unfortunately, highlight the division within Europe itself.
The chaos will also, once again, push the global economy to the brink. And, this time, with countries having already exhausted much of their policy firepower fighting the 2008 financial crisis, a global meltdown will have a devastating impact.
The issue is whether the crisis will unite the developed nations into forcing China to take the initiative.
If China, which is struggling to tamp down the property bubble and resurgence ofinflation, does comply, it is more than likely that it will seek to maximize its global ambitions. Its track record, which reaches mercantilist proportions in some African countries, only reaffirms everyone’s worst fears about China.
The country’s approachto dealign with the West, and its push into Africa and Asia may have lost it some allies and, worse, created new enemies.
Over the next two days, there will be more clarity on China’s strategy. This writer believes that the country will come to the party, but extract a price. The question is: who will pay the bill?
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at email@example.com