Greek fiasco reflects EU's internal weakness

• Source: Global Times
• [22:21 March 08 2010]
• Comments

Illustration: Liu Rui

By Iain Mills

Reports that China may be willing to take on Greece's debt will no doubt raise a few eyebrows, especially among those who feel China already holds too much of the West's sovereign debt.

Most of the world's major economies were forced to borrow heavily from China to fund last year's economic recovery packages. The possibility that Beijing will now take on Greece's debt is, on the surface, a potentially viable solution.

However, on a deeper level, this prospect should set off alarm bells. This is nothing to do with China or its existing sovereign debt holdings; rather, the issue relates to profound internal questions about the economic and political function of the European Union.

First, on an economic level, a Chinese bailout would not be in Greece's interests. At the centre of Greece's woes is a debt restructuring plan arranged by Goldman Sachs in 2001; shifting the debt once more might provide short-term relief, but it would not address the structural deficiencies of the euro or provide Greece with the necessary tools for domestic economic stability.

China's prudent economic management over the last 30 years has put it in a position to underwrite other nations' debts.

It is encouraging to see that Beijing is willing to use its wealth in this way. However, there is a risk that other nations will simply use China as a source of credit to brush current difficulties under the carpet, borrowing more rather than addressing the root causes of the crisis, such as debt-financed spending.

Apart from these economic concerns, the fact that European nations seem unable to agree on a rescue package for Greece evinces a series of political weaknesses that cut to the heart of the EU.

One of the major incentives for smaller nations to join the EU is the stability it offers. A failure to respond adequately to events in Greece would effectively remove this incentive as well as raising additional concerns over the ability of the EU to deliver coordinated solutions to major regional issues. If EU members cannot agree on a course of action for Greece, then what is the point of the coalition?

The fact that China might have to rescue a eurozone state should come as a serious wake-up call for the legions of policymakers in Brussels.

How is it that the most developed and supposedly wealthy regional coalition in the world is forced to look outside for economic support? Surely the onus should be on eurozone nations to pick up the pieces of Greece's profligacy.

The irony is, of course, that following the Treaty of Lisbon, the EU now has an unprecedented range of powers and responsibilities – in theory, at least. Yet, it seems all the arm-twisting and backroom deals which were required to push the Treaty through have left many weary of pan-European cooperation.

In addition, the sprawling, bloated and undemocratic institutions in Brussels may have become so unwieldy that they cannot perform the functions of government.

Following the pain caused by the ratification of the Treaty of Lisbon, as well as the ongoing schism over Turkey's potential accession, the Greek crisis is further evidence that major ideological and practical divisions severely limit the EU's scope of action.

The coalition is facing profound challenges in terms of defining its role, function and purpose in the post-crisis political economy.

This is why turning to China for a quick financial fix would be damaging to the EU's long-term health and vitality. The Greek crisis is the first opportunity the EU has had to implement its post-Lisbon powers, to unite a continent behind a common cause and develop a common solution.

In this, it seems to be failing. But rather than simply looking elsewhere for assistance, Europeans should instead be asking why they cannot coordinate a rescue package. What systemic features of the EU's institutional architecture are preventing this, and how to rectify them? To what extent do ideological divisions render the EU an impotent entity?

Nothing unites diverse interests like money, and the prospect of greater wealth for all has long been the EU's most powerful selling point.

For this reason, the EU should see China not simply as a source of credit, but instead take a more profound look at the country's successful management of a heterogeneous economy over the past 30 years and consider what lessons can be learned.

China's economic watchwords of prudence and gradualism are what Greece and other EU nations really need to borrow.

The author is a Beijing-based freelance writer specializing in Chinese political economy. sigmills@hotmail.com