Category Archives: politics

Why does the EU trade with China?

Trading with China. Is it worth it?

Trading with China. Is it worth it?

Reports coming out of Syria in the last week suggest that the Assad regime has used chemical weapons against civilians, which once again brings into focus the impasse on the UN Security Council with regard to the international community’s response.

As has been the case since the Syrian crisis began, Russia and China remain opposed to intervention, whereas the US, Britain and France want to keep intervention open as an option.

Why Russia and China have taken this position, in the face of of overwhelming evidence of serious human rights abuses, is presumably explained by some article of faith in their approach to geo-politics. China’s response is perhaps the least surprising of the two, given that the Communist Party of China only cares about one thing: the Communist Party of China.

China’s apparent disdain for the well-being of anyone who isn’t Chinese, or indeed, anyone who isn’t a high ranking official in the Communist Party of China, begs the question as to why other nations, or trading blocs like the EU, are so willing to trade with China.

If it were the case that the Chinese population had an insatiable desire to consume products and services produced in the the EU or the US, wherein millions of jobs were created in the process, the jagged edges of the Chinese regime could perhaps be overlooked.

What is peculiar is that the opposite case is true: EU and US consumers can’t get enough of Chinese products, which has led to a economic boom in China and the perennial decline of the manufacturing in the west.

The EU’s own summation of its trade relationship with China is telling. In 2011, the EU recorded a €159bn trade deficit with China, or in other words, we bought €292bn worth of plastic crap from them, while they only bought €136bn worth of cars, chemicals, movies and software from us.

Furthermore, the EU doesn’t appear to be very happy with its trading relationship with China. For instance, it has complained that 73% of all fake goods seized at EU borders come from China (much of the IP of which is owned by EU citizens) and that of 22,000 telecommunications licenses issued in 2011, only 23 were awarded to foreign companies.

Overall, a picture emerges of a very imbalanced relationship, where one party is flooding the market of the other with cheap rubbish produced under very suspect labour and environmental laws, while at the same time doing its utmost to prevent that party from entering its markets on an equal footing to indigenous companies.

So why does the EU persist with this relationship? The cost, both in terms of unemployment in the EU, the EU’s trade balance and the wider impact of China’s industrialisation on the global environment, would appear to suggest that the benefits are limited, if any.

The long term thinking seems to be the short term pain is worth it, so that EU companies can gradually eat into the vast Chinese consumer market as China slowly deregulates.

But really, is this what EU citizens want? Would we not be better making our own plastic toys, shoes, mobile phones and toothbrushes, and paying a bit more for them, if it meant there were more lower skilled jobs available? The net effect of this on EU states who are struggling with unsustainable social welfare burdens would be significant.

And would we not be better off if China’s wasn’t churning out millions of tonnes of Co2 emissions into the atmosphere, well beyond China’s borders, in order to make all this rubbish for a euro less than we can make it ourselves?

And would Africans not be better off if Chinese oil magnates were not buying up half the Continent in order to supply energy for the the next phase of their industrial expansion, while the EU struggles with a conversion to renewables?

And ultimately, would we not be better off if China’s continuing ascent up the Superpower league, financed by their trade deficit with the EU and US, were thwarted, so that when situations arise like that in Syria, the UN Security Council could deal with it on a humanitarian basis, rather than having to bow to Chinese paranoia about global politics?

What am I missing here?

Whose debt is it any way?

Short term memory loss. Where did all the money come from if its wasn't from the banks?

Short term memory loss. Where did all the money come from if its wasn’t from the banks?

People in Ireland, and I suppose people in general, love to hate authority, and none more so than faceless, well paid authority like the European Central Bank (ECB).

This hatred was in full flood last week, as it emerged that the Fine Gael and Labour government had reached an agreement with the ECB to change the manner in which the Irish State makes good the impaired debt on the balance sheet of the Irish Bank Resolution Corporation, formally known as Anglo Irish Bank.

Previously, the Irish State have given the IBRC what is known as a Promissory Note, which is like the name suggests, a promise to pay the bank money at some future date, or in this, case approx. €3bn every year for 10 years. The IBRC then used this Promissory Note as security to borrow money from the Irish Central Bank to make good its balance sheet, so that it wouldn’t go bust and take the entire Irish Banking system down with it.

For a State collects approx. €35bn in tax revenue each year, and which has a sizeable budget deficit, €3bn per year is a sizeable chunk of change. A more palatable arrangement, argued the Irish Government, would be for the Promissory Note to be paid back over a longer period of time, which would give the State time to rebuild its economy, wherein the debt burden would require less credit financing, thereby reducing the cost to the Irish taxpayer.

A quite reasonable proposal it would seen, but the ECB is legally barred from engaging in what is called Monetary Financing, which means using the market mechanisms of the ECB, and it network of Central Banks, to provide de facto financial assistance to a member state.

The ECB viewed any extension of the debt held by the Irish Central Bank as Monetary Financing, and was loath to support any such move; and while the ECB was providing the bulk of the liquidity available to Ireland’s banking system, the ECB held all the cards.

That is until last week, when Irish Government officials finally won the ECB officials over to their side of the argument. Speculation has it that the ECB badly needed a success story, and Ireland was their prime candidate, so a deal was done to allow the Promissory Note to be converted into a series of long term bonds, reducing the Net Present Value of the debt being paid by the Irish taxpayer significantly.

To the casual observer, this would seem like a good news story. A conservative analysis of the likely cash flows arising from the deal shows that the Irish State will have an extra €1bn to play with in their annual budget for at least the next 10 years. It also means that the State’s cost of borrowing will come down, reducing the debt burden for future generations of Irish people.

The strange thing was that this wasn’t universally greeted as a good news story back here in Ireland.

To understand why, you need to look at where the debt arose from in the first place. Anglo Irish Bank was a reckless bank, lending money to property developers in the teeth of a very obvious property bubble. When the bubble finally popped, and the developers ran for cover, Anglo was left with a huge hole in its balance sheet.

Faced with its economy and banking system going into a tail spin, and frozen out of the sovereign debt markets, the Irish Government sought assistance from the EU Commission, the ECB and the IMF. The “Troika” as it became know, agreed to lend the Irish State the money required to keep the lights on, subject a list of conditions, one of which was the the debts of the Irish banks had to be made good by the Irish taxpayer.

And now you see why the good news from last week wasn’t received as such.

For 4 years, since the depth of the Irish banking crisis became known, the Irish media has been telling the Irish taxpayer that they have been greatly wronged by the Troika deal. And its not hard to see what the Irish taxpayer would agree with such analysis.

Anglo Irish Bank was a private bank, that borrowed money from other private banks, and then loaned it to private persons. Where exactly does taxpayer fit into this? Why should the taxpayer have to pick up the tab for the follies of a private bank?

The answer to this would seem pretty straightforward. The bank should be told to go fiddle, and the taxpayers should just go about their business. And for Irish taxpayers who have endured 4 years of budget cutbacks, that answer was a perfect fit.

And that’s why, for many, the news of the deal with the ECB wasn’t good news. For them, the only good news would have been if the Irish Government had told the ECB, and their Troika partners, that they were going to stop paying the Promissory Note altogether, as is suggested by an endless stream of commentators and celebrity economists in Op-Ed pieces and on talk radio shows.

For these people, its a question of morality. The debt had nothing to do with them, so why do they have to pay it back.

And from purely legal and technical perspective they are right. The problem is that if you want to make a moral argument, you have to allow that argument be judged on a moral basis, and the problem for Ireland’s debt rejectionistas, is that there is no moral basis to their argument.

Ireland’s property bubble started around 2002 and popped in 2008. In those years, Irish banks injected a mountain of borrowed money into the Irish economy, primarily into the construction industry.

For example, at the height of the bubble in 2006, Irish property developers built 93k new homes. If the average cost of each home as €200k, and 70k of the 93k homes were loan financed (all conservative estimates) that equates to €14bn loaned into the economy in that year, and that’s for residential development only. You could add another €5bn at least for commercial development.

That’s a huge injection of cash into an economy of 4m people. And its impact was immediate. Wages went up, asset values went up, Government tax revenues went up, public spending went up, capital spending went up, taxes came down, and all over a period of 6 years.

In short, every man, woman and child living in Ireland benefitted from the money that Irish banks, and in particularly Anglo Irish Bank, was lending recklessly into the Irish economy.

It is this point that seems to be eternally lost on those Irish people who continually reject the notion of paying back Anglo’s debt.

What they don’t seem to realise is that it is this point that is foremost in the mind of the Troika, who understand that allowing Irish taxpayers to detach themselves from the debts of the Irish banking system means that other EU taxpayers will have to step into the breach, either through having to make good the debts of the Irish banks, or seeing the value of their savings decline as the ECB pumps money into the eurozone system to cover the debts through inflation.

So on whose side does the moral penny finally fall? Yes, in an ideal world, we could just let the banking system cave in, but in sophisticated credit driven economies, that isn’t an option.

If ultimately, some taxpayers somewhere have to make good the banking debts, is it not just that those taxpayers who benefitted most should be in the vanguard?

The Troika seem to think so.