EU is still broiled in debt crisis and many are frantically searching for solutions. Besides occasional finger pointing, much focus has been on how much these affected countries should cut government expenditures in order to restore fiscal balance and how those less affected countries should (not) pay for stabilizing the situation. Unfortunately, all these are from within EU.
Not to mention political difficulties, as the crisis prolongs and more countries are dragged into the crisis, solutions from within will become more difficult to find financially. So instead of bootstrapping itself out of the financial quagmire, it is time for EU to look for solutions outside of EU, i.e. to leverage itself out of the debt crisis.
What leverages does EU have? Despite all the financial and fiscal woes, EU remains strong in many areas of its real economy. It still has highly productive and innovative work force, well-run multinational companies and sophisticated technological know-how in energy and environment. These are very powerful leverages EU can use to entice China to help it out of the debt crisis.
To sustain its economic growth, China has set to improve energy efficiency, environment, and upgrade its industrial and agricultural technology. In all these areas EU can help. One way for Chinese companies to learn is through investments of EU companies in China. Alternatively, Chinese companies can invest or acquire EU companies. EU can make the process easier and friendlier for Chinese companies.
In order to recover from the current crisis, EU needs not only stabilize its financial system in the short run but also improve its productivity, and China can help in both fronts. By investing in China and applying the technology to a wider market, EU companies can improve their productivity. With China’s infusion of capital, EU companies can also continue to develop their cutting edge technology.
EU’s fears of competitive losses due to such technology transfers should be overcome by the sense of urgency of debt crisis. Although not the most palatable, compared with being deeply ridden by the debt and paralyzed by the need of deleveraging, losing some competitive edge in the short run may not be a very bad choice. After all, it is time of crisis, and options are limited.
Once the economic benefits of corporations of EU and China are clear, financial resources will be available. China has over $3 trillion foreign exchange reserve that can only be used abroad. China can invest in both EU governments and companies. Using it to stabilize a very important market for China’s exports and in the meantime to improve its own technology and economy is of great interest for China.
China has repeatedly made clear that it will buy sovereign debt issued by troubled EU country governments. To fully leverage on its valuable resources that interest China, EU, governments and businesses alike, can be much more creative. For example, EU governments can set up investment funds jointly with China in industries that China is interested in. Banks can offer convertible preferred stocks to Chinese banks. Governments in crisis can even issue debts to China that is tied to their future economic growth. EU economic growth is China’s best interest. By making it possible for these troubled countries to regain its footing and resume economic growth, China should be able to share the benefits in the future. The more it can share EU’s future, the more China will be willing to help.