The Scramble for Europe

The impact of Chinese purchases and investments in Europe

The European Council on Foreign Relations (ECFR), a think-tank founded in 2007, has published a report titled “The Scramble for Europe” on China’s “game-changing” economic presence in Europe. The name alludes to the “scramble for Africa” at the end of the 19th century, when took place the frenetic race between the European governments to conquer and to colonize the African continent. With the postcolonial results at sight, the name just wakes up fears among Europeans.

The document takes a position about the intra-European debate to the landing of Chinese money. During the recent visit of the Chinese Prime Minister to Hungary, Germany and Great Britain, the European press showed diverse positions. For example, David Cameron, British Prime Minister, said that he views Chinese investment as a good thing, not as something to be feared. Instead, he preferred to stand firm on the question about human rights in China.

Other Europeans adopt the opposite stance, keeping quiet about the issue of human rights but seeking to protect their industries from Chinese competition. The press also showed the clear difference of postures adopted by Europe and the United States: “… in welcoming China, Europe is swimming with the tide of history; America is struggling against it”, published The Economist.

Europe, is not the Africa of then; by the way, it is rich and technologically advanced; Europe, as a block. But it is also true that its state members, by separated, are neither rich nor technologically advanced. In this crisis, it has been manifested that the eurozone is not a political alliance and it is not acting like that; on the contrary, each country acts by its own, and according to its own interests and convenience. Many countries of today’s Europe are thus defenseless against a financial or economic “colonization”.

The debate is on the table, and it just begins.

The ECFR posted on his website[i]:

China is using its growing economic strength to buy up strategic assets in Europe, from companies to government debt and infrastructure contracts. A new brief published by ECFR ‘The scramble for Europe’ explores the extent and nature of China’s game-changing presence in Europe.

China has moved on from buying African ports and building Saudi railways, taking advantage of its economic strength and European weakness to buy up Europe. Its acquisitions include infrastructure such as ports and railways, symbolic car companies like Volvo and MG, and high tech firms. It has bought large quantities of debt in the EU’s troubled periphery and won government contracts while excluding European companies from bidding for Chinese contracts.

The report’s authors, François Godement and Jonas Parello-Plesner, argue that:

            • European supply is fed by the short-term need of cash-strapped countries, but this threatens Europe’s medium term interests.
            • China’s acquisitions are dividing European countries, just as they were developing a more coordinated and tougher strategy towards Beijing.
            • The crisis is allowing Chinese companies not just to strike cut-price deals but also to play off member states against each other and against their own collective interests – a strategy China has already used in the developing world.
            • If China wins support for its policies with this greater influence, Europe may pay the price on a range of issues, from global financial reform and international governance to environmental norms and human rights.

5 years ago the story was European companies establishing bases in China. Now the story is that China is strategically acquiring European companies – giving it ownership of vital infrastructure, access to cutting-edge technologies and allowing it to play some European countries off against others.”

Recommendations:

            1. The EU needs a system to vet direct investment in specific industries such as defence, media, education and critical technologies.
            2. Europe needs to introduce fair competition for public procurement (eg to force Chinese firms to demonstrate that they do not benefit from soft loans) and push to be allowed to compete for Chinese contracts.
            3. Europe needs a clear statistical system to track Chinese bond purchases.

Background:

            • In the 2 quarters from October 2010 to March 2011 Chinese firms and banks committed $64 billion on European contracts – more than half the total investment and trade facilitation flows in Europe since 2008.
            • China is thought to own 25% of its reserves in euros, but there is no way of knowing whether this figure is correct.
            • 30% of China’s investments are in Portugal, Greece, Italy and Spain; another 10% are in central and eastern Europe.

Notes for editors:

            1. This report, like all ECFR publications, represents the views of its authors.

The ECFR study sets out the following three areas of concern, bond diplomacy, direct investment and Europe’s open market for public procurement.

The following are selected quotes from The Scramble for Europe[ii] report:

A kind of “scramble for Europe” is now taking place as China purchases European government debt, invests in European companies and exploits Europe’s open market for public procurement. Crisis-hit Europe’s need for short-term cash is allowing China not just to strike cut-price deals but also to play off member states against each other and against their own collective interests – replicating a strategy it has already used in the developing world. The expansion of China’s presence in Europe is creating new fault lines within Europe and making it much harder to implement the more coordinated and tougher strategy towards China that the EU was beginning to develop. As Europeans compete with each other for Chinese business, they are reducing their chances of collectively negotiating reciprocal access to Chinese markets.

This brief argues that Europeans should not blame China for taking the opportunity to expand its economic foothold inside Europe and leverage its financial and commercial influence with cash-strapped member states. Nor should they resort to protectionism. Instead, they should unify around their collective interests and take steps to create a rules-based and level playing field on which European firms are able to compete in China in the same way that Chinese companies can in Europe. In particular, they should create a coordinated system for government debt purchases and a system for vetting direct investment, and encourage fair competition in public procurement.

Bond diplomacy: China’s purchase of Spanish and Greek bonds over the past year, and yesterday’s promise to buy from Hungary, have made it a bilateral lender of last resort for politicians in indebted countries. This has serious implications for Europe’s ability to present a united front to China on issues such as trade reciprocity, climate change and human rights.

Direct investment: Five years ago, China’s total direct investment in Europe was $1.3 billion. So far in 2011, there have already been three deals that have exceeded that amount.

Europe’s open market for public procurement: While European companies are excluded from public procurement in China, European taxpayers are subsidising Chinese businesses that bid for European contracts.

The Chinese presence in Europe thus calls for the same response as for the sovereign and banking crises: a demonstration of political unity and a policy process that matches this unity. This will not be easy at a time when the priority of many European governments is to achieve budgetary cohesion or survive the next election.

By Raúl de Sagastizabal