The impact of the European debt crisis on Sino-EU economic relations （Zhang Min）

Since early this year, the Greek debt crisis has had a domino effect on Europe. It has reduced the confidence in European economies, while Spain, Portugal, Ireland, and Britain show signs of a similar crisis. Both the fiscal deficit and public debt have gone beyond the ceilings regulated by the Stability and Growth Pact (SGP). According to official statistics, Ireland, the UK, Spain and Portugal are most at risk with an average government deficit of 12 percent.

The Greek government took measures to ease the crisis; however, its debt problem was severe and rooted in excessive expansionary fiscal policy for years. On April 27, Standard & Poor's decreased the Greek debt rating to "junk" amidst fears of default. Yields on Greek government two-year bonds rose to 15 percent following the downgrade, and stock markets worldwide declined.

In order to save euro from disintegrating, on May 2 euro zone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh austerity measures. On May 9, Europe's finance ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe.

For the EU, the rescue package and bailout is a historical turning point since the euro's launch in 1999, with significance for Europe and rest of the world. Without the rescue package, the European economy would have become more imbalanced and suffered severely. Some of EU member states have been forced to take austerity measures, and we've already seen declines in import demand.

In the 35 years since the establishment of China-EU diplomatic ties, trade and economic relations progressed steadily, and as the EU increased its membership, the relationship has grown closer. Since 2004, the EU has been China's largest trade partner, largest export market, and largest source of technology imports. In 2009, the EU became the third largest source of foreign capital, surpassing Japan. Therefore, the European debt crisis is having several impacts on Sino-EU economic and trade relations.

Economic and trade relations are the most important elements of the EU-China strategic partnership.

The European debt crisis is a catalyst for the partnership to become more meaningful. On May 10, Chinese Premier Wen Jiabao said the international community needs to further enhance cooperation with long-term efforts, and added that China would support these initiatives. He said he believes euro zone countries can overcome these difficulties and grow their economy. The Chinese government's active attitude toward the crisis will improve EU-China relations.

In euro zone, weak domestic demand has lead to the import of more Chinese goods while the euro's steady devaluation has had a positive impact on European exports to China.

A steady devaluation of the euro has followed the Greek crisis earlier this year. Looking back, the euro was launched at $1.17 and fell to $0.82 in late 2000. It went as high as $1.60 in July 2008. Recently it's hovering around $1.22, which represents a nominal depreciation of roughly 24 percent relative to its peak. Given that euro zone countries run an account deficit, offset almost entirely by the German surplus, there's a good case for saying depreciation is desirable, as it boosts euro zone exports.

In principle, the euro's devaluation has made EU exports more competitive in China, and this has changed to some degree the trade balance between China and EU. According to customs statistics, in the first quarter of 2010, China-EU trade value reached $101.47 billion, up 35 percent from last year, and accounted for 16.4 percent of China's total foreign trade value. Among them, China's exports to the EU reached $65.37 billion, accounting for 20.7 percent of China's total export value. China's imports from the EU rose by 43 percent to $36.09, and accounted for 12 percent of China's total import value – much higher than the 31-percent growth of China's exports to the EU.

It seems the European debt crisis provides an opportunity for China's investors to enter the European Market, especially Southern European countries.

Although China is in the late start of direct investment in the EU, the total amount of investment has showed momentum. By the end of 2009, China's accumulated investment in the EU amounted to $3.67 billion, with increased investment in Britain and France.

Currently, some Chinese enterprises have seized the opportunity to invest in Greece. For example, shipping giant China Ocean Shipping Company (COSCO) recently signed an agreement with the Greek Piraeus port authority on operating the container terminals. Under the agreement, piers II and III will be under COSCO management for 35 years. COSCO plans to invest 550 million euros (about $687 million) to upgrade the facilities of the two piers.

Meanwhile, in order to protect its national economy, new round of protectionism will arise in Europe.