China Versus The EU: What A Contrast

Business, China, Company Strategy, Europe, Oil & Gas

By John Richardson

IT is worth comparing what is happening in China today with what is happening in the EU.eu-china-flags

First of all, in China we are seeing:

  • A political leadership that has been honest enough to admit that China got it wrong in the past.
  • This has led to a new economic and social growth model. If this bold, brave experiment works, China’s prosperity over the next 20 years and more will be guaranteed. In fact, it has every chance of replacing the US as the world’s leading economic, social and political power.
  • There will be losers and winners in this process over the next five years or so. For example, real estate developers, steel mills, cement factories and petrochemicals producers, buyers and traders may well go bust in numbers that will take the majority of commentators by surprise (more on this in later posts).  At the same time, of course, those who financed these companies will also be in trouble.
  • But there seems to be a pragmatic acceptance that once bad investments have happened, there is no point in hiding from the consequences.
  • And crucially, there should be more winners than losers. This is the whole point of China’s economic about turn. There has been a recognition that the majority of people are today worse, rather than better off, as a result of income inequality and  terrible environmental problems.
  • At the core of this new direction is also a recognition that demographics drive demand. Even without the environmental and debt crises that China now confronts, it could not have continued on its low value, mass manufacturing course for much longer because of its ageing population. China is in danger of becoming old before it becomes rich enough to adequately look after its old people.
  • A ground breaking World Bank report, which was released in February 2012, made all the faults with China’s old growth model very clear. What was very significant about this report was that it was endorsed by Xi Jinping and Li Keqiang, who at that point were China’s new leaders in waiting. Can you imagine any European politician inviting in the World Bank to conduct a “no holds barred” report, pointing out the mistakes of the past? I am struggling to think of any European leader that would fall into this category.

Sure, from a Western perspective, and I have had many emails to this effect, you can point to a lack of democracy and human rights in China.

But what about the human rights of the nearly 50% of Greek young people who are out of work?

What is happening in China is far from perfect. Nothing is perfect.

Now let’s contrast this with what is happening in Europe:

  • You have a divided political leadership. Whilst the north, led by Germany, is arguing against debt forgiveness, and remains firmly pro-austerity, the south is very different. This was most obviously highlighted by the victory of Syriza in Sunday’s general election in Greece.
  • There is thus no shared political vision about where Europe is heading. Part of the reason is, of course, a lack of true political and economic union. As my colleague Paul Hodges argues: “At the moment you have a currency zone with a free trade area, plus some aspects of political and economic union. This half-way house is essentially unstable, as Helmut Kohl and Francois Mitterrand agreed back in 1990 when calling for full European political union.”
  • A failure to recognise that the past is the past and you cannot change the past. Yes, Greece etc. shouldn’t have borrowed the money. Equally, the creditors should not have made the loans. But you have to move forward. No amount of austerity is going to make these debts repayable and so they have to be restructured. And the more austerity you impose, the more likely it is that “extreme” left and right parties, such as Syriza, will gain power. Podemos could be next in Spain, followed even by the National Front in France.
  • A failure to recognise that most people are not that interested in financial markets. They are more concerned about decent job prospects, healthcare and food etc. If you push them into a corner, they will always vote for keeping hospitals open versus more austerity.
  • A failure to recognise that demographics drive demand in Europe, also. Europe’s politicians need to follow in the footsteps of their counterparts in China. They need to devise a whole new growth model that takes into account the impact on the nature and quantity of demand of rapidly ageing populations across Europe.

This is all very depressing and the way things are going at the moment, I cannot see any reason to revise my three predictions for Europe in 2015, which I made on 6 January.

In short here, they were:

  1. There will be a widening gap between the pro and anti-austerity political camps.
  2. This turmoil will lead to very low GDP growth – if there is any growth at all.
  3. Meanwhile, deflation will become more firmly entrenched, which will cancel out the bulk of the benefits from lower oil prices.
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