The following article originally appeared in Beijing Times.
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This week Greece’s Prime Minister Samaras met, and publicly argued, with German Chancellor Merkel over the EU’s latest attempt to solve the Greek economic crisis. Given that earlier misunderstandings in China of the dynamics of Europe’s crisis have damaged its own economy it is therefore important that a correct assessment is made of this new stage in Europe.
The reason China was previously damaged by a wrong analysis was that the seriousness of Europe’s economic crisis was considerably underestimated. By July 2012 China’s exports to the EU had declined by 16% in a year – easily the most serious blow to China’s exporters. Yet a year previously few analysts in China were predicting such negative European trends.
The reason for this widespread underestimation of the seriousness of the situation was that many analysts in China supported austerity policies being pursued in Europe and rejected the alternative proposal for European governments to launch economic stimulus programs. As most European governments were following austerity, and austerity was considered the correct policy, such Chinese analysts concluded Europe’s crisis would be overcome.
However the results clearly show that Europe’s austerity policies have worsened the situation and analysts who supported Europe’s austerity policies were dangerously mistaken.
To assess accurately Europe’s real economic dynamics, and their consequences for China, first the overall results of the different policies pursued internationally to deal with the financial crisis can be summarized and then the situation in individual European countries analyzed.
Internationally three types of policies were adopted in response to the financial crisis:
· The EU combined loose monetary policy with no stimulus to the productive economy – the ‘austerity’ approach. The outcome is that EU GDP is 2.1% below its peak of four years ago and Europe is in ‘double dip’ recession.
· The US combined loose monetary policy with a stimulus to consumer spending via a large budget deficit. The outcome is that average annual US GDP growth in the last four and a half years is only 0.4%
· China combined loose monetary policy with an investment focused stimulus to the productive economy. China’s GDP grew by more than 40% in four years.
The EU’s ‘austerity’ policy was therefore easily the least successful approach to dealing with the financial crisis. This is further confirmed by analyzing the individual EU countries committed to austerity. In the UK, where Cameron’s government voluntarily implemented the policy, GDP is 4.5% below its peak output and the UK is in a new recession. Considering countries which adopted austerity as a condition for bailouts, Ireland’s economy is 8.8% below its peak, Portugal’s GDP is 5.2% below its peak and has been declining for two years; Spain’s economy is 4.7% below its peak and is in a new recession, while in Greece the economy has contracted by 13.0%.
Given these dreadful economic results analysts in China should realize support for Europe’s austerity policies was mistaken. Instead they should hope European leaders will initiate an EU wide economic stimulus. As Greece is clearly too small to launch this, a stimulus must be started by the main European economies. International experience confirms such a stimulus will be more effective if concentrated on investment, as in China, rather than on consumption as in the US. If neither stimulus is launched then China must prepare for a long drawn out European crisis with negative consequences for China’s economy.