As Europe stumbles, alarm bells sound for US and China

As Europe’s leaders dither in the gathering storm, its main trading partners are taking steps to safeguard their interests.

The US Treasury secretary, Timothy Geithner, will be making on Friday his second trip to Europe in less than a week, while the chairman of China’s largest sovereign fund was in Rome last week for talks with Italy’s finance minister, Giulio Tremonti.

The high-profile visits come amid heightened concern about Europe’s debt crisis and the risk of further contagion, with the prospect of a Greek default on its debt now back on the table.

European stock markets have slipped to their lowest level since 2009 following a month of torrid trading, with leading French banks losing up to two thirds of their market value.

And with European leaders showing little appetite for bold moves, governments in Washington and Beijing are concerned things may get worse.

Chinese overture

Fears of contagion in Europe’s debt crisis have hinged on Italy, whose ballooning public debt is second only to that of Greece.

The eurozone’s third-largest economy has been plagued by a toxic cocktail of high debt, slow growth and persistent political instability, which has rattled investor confidence and hampered Italy’s efforts to raise money on the liquidity market.

As a result, the Italian government has turned to China in the hope that it can sell chunks of its debt, and of its cash-strapped businesses, to Beijing.

“If they help get Italy’s sputtering growth back on track, foreign investments are most welcome, even if they come from China,” said Françoise Lemoine, a China expert at the EHESS in Paris.

Ironically, Italy’s overture to China has been led by Finance Minister Giulio Tremonti, who once warned of the threat of a “reverse colonisation” by China.

On Tuesday, Italian officials confirmed that Tremonti had met with the powerful chairman of the state-owned China Investment Corporation (CIC), whose job is to invest Beijing's $3.2 trillion in foreign reserves. But there was no confirmation of a deal.

Adding to the sense of urgency, it later emerged that Italy had paid a record 5.6% interest on the sale of five-year bonds, dangerously close to the 7% mark that heralded bailouts for Greece, Portugal and Ireland.

Beijing’s interest

Should Italy suffer a similar fate to Greece, it would spell disaster for Europe – and indeed for China.

“Europe is the biggest importer of Chinese goods, ahead of the US, accounting for 19% of China’s exports,” Lemoine told FRANCE 24.

A sharp downturn in Europe would bring consumption down and hurt China’s export-oriented economy.

“China will be keen to avoid a repeat of the job haemorrhage caused by the subprime crisis in the US and Europe, when millions of mainly seasonal workers in China lost their jobs, though they didn’t appear in official statistics,” said Thomas Vendryes of the Paris School of Economics, in an interview with FRANCE 24.

But it’s not just jobs China is concerned about. A collapse of the eurozone could also jeopardise the estimated 700 billion euros worth of European debt purchased by Beijing.

Such is the scale of China’s involvement in Europe, “that it is in Beijing’s best interest to help preserve the stability of the eurozone”, said Lemoine.

Inspector Geithner

Another country in need of a stable and healthy trading partner is the US.

Unlike China, the US is not in a position to prop up Europe’s faltering economies. But it is just as vital for Washington to see Europe growing again as it is for Beijing.

In rare criticism of his transatlantic allies, US President Barack Obama has urged European leaders to coordinate their efforts to deal with the debt crisis.

Underscoring Washington’s concern, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday, less than a week after flying back from a G7 meeting in Marseille.

In between the two trips, Geithner warned European leaders not to delay their efforts to stem the crisis. “Europe needs to take more forceful action to generate confidence that it can and will resolve its crisis,” he said in an op-ed published in the Financial Times on Monday.

Christine Rifflart, a US economy specialist at the Parisian University Sciences Po, says Geithner will arrive with a clear message for European leaders: “Slow down your austerity drive or you will hamper our new stimulus effort”.

Indeed, while European governments scramble to cut left, right and centre, Obama has presented a new plan to stimulate demand and boost job creation. And what he doesn’t want, said Rifflart, “is for his plan to result in the US buying European goods but not the other way round”.