China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Summer reflections – new opportunities for the EU, China and Africa

June 28, 2017

Pro-European citizens in the currently 28 EU states certainly dislike the British decision to leave the European Union (EU), probably in 2019. However, the British departure from the EU should now encourage the remaining EU-member countries and Brussels to think more strategically and concretely about the future of the EU. What should be done? What can be done?

First signals in such a positive and more encouraging direction can already be recognized. Important topics and reform areas, however, should be addressed more transparently already in the near future. Many of them are well known, others have been scarcely discussed so far. Much can be done to rejuvenize the image of Europe and the EU itself. In this respect, the British withdrawal from the EU – with all its disadvantages – also offers new opportunities.

Below, three examples are summed up and briefly elaborated on, dealing with digitalization and relations of the EU to China and Africa. All three different cases affect both politics and business, i.e. the EU as an institution and the corporate sector in the member states.

Readers of this article may wonder why an economist wants to deal with such a complicated political issue as the EU exit of the UK. The answer, however, is much easier than one may believe: political and economic developments have been interlinked in the past few decades to an extent that they in many cases cannot be separated from each other anymore. This is certainly true also what concerns the economic future of Europe. However, this obvious reality of internationalization and globalization has not reached out to all producers and users of economic forecasts so far.

A similar kind of lagging interdisciplinary understanding can also be found between the large areas of microeconomics and macroeconomics. Microeconomic improvements – for instance when it comes to education, innovation, entrepreneurship, working conditions for women, foreign direct investments, taxes, etc., can indeed have a positive impact on long-term macroeconomic GDP growth as well – a correlation that is often forgotten or neglected by forecasters, other kind of economists and politicians. The EU and its member countries should work with these microeconomic issues much more intensively and ambitiously than in the past. It could mean a good way into the future.

Let’s now get back to three above-mentioned examples of areas which the EU and its member countries should focus on in the next few years, among many others. These three areas serve only as exemplifications and do not reflect – despite their importance – any given preference of the author.

Digitalization

Digitalization is certainly an area that will gain much more momentum in the foreseeable future – a most probable development that should be taken increasingly seriously by the EU and its member states, employers and unions. Many new, interesting IT-products or products with applied IT-technology will enter domestic and international markets in the forthcoming years. To get there, the EU, its member states and corporations have to raise IT skills on all kind of research, development and application levels, also in order to meet all upcoming future cyber risks in an appropriate way.

All these needs urge for many future cross-border activities within the EU – as indicated also what concerns the important area of cyber security. Promising and in praxi working ways forward have also to be found in order to reduce the IT-outsider and IT-insider problem on the labor markets (applying here the outsider-research results of the great Swedish economist Assar Lindbeck who, by the way, really deserves the Nobel Prize in Economics as soon as possible).

China

EU relations with China should be regarded as another area that could be improved considerably, including bilateral trade and co-operation in research, investment, the environment, energy, urban planning, health care, institutional improvements, IT protection and cyber security, exchange of students, etc. Increasing trust between the EU and China could mean more trade and other commercial business between these two giants and, consequently, contribute to better economic growth on both sides.

Without doubt, the EU has now a fair chance to improve European co-operation with China which certainly would be a win-win situation for the EU and its member countries, China and the rest of the world – particularly if China really is willing to stick ambitiously to the Paris climate agreement. It should not be forgotten that more clarification and progress in EU-/China-relations could support European corporate activities in and with China in times when many companies have to change their business model for China already as a result of China’s ongoing reform policy. In this commercial context, generally improving European relations with China may appear even more relevant. This should be concluded without considering China’s self-proclaimed global role as prominent defender of free trade and the Paris climate agreement.

Africa

The third example for concrete new opportunities for the EU and its member countries deals with Africa. Africa must in most respects be considered as a lagging continent – but with a rapidly increasing population and still hidden good economic potential. Time has come when traditional European aid-oriented development politics for less advanced countries should be replaced by more concrete long-term growth strategies and measures – a necessary policy change that the German Chancellor Angela Merkel repeatedly has pointed at more recently.

Sure, a long-term perspective has to be applied in the hopefully modified EU relations with Africa. However, if taken seriously, it could be worth-while to increase efforts – from the north to the south of Africa but also for the EU itself. New commercial opportunities could show up – and possibly at some point less pressure from (potential) African migrants. It would, of course, be wonderful if more and more African citizens gradually prefer to stay in their home countries for one specific reason – i.e. that the future finally looks better and more promising.

Ways forward for the EU

Altogether, the examples chosen above hopefully give some alternatives how and where the EU could move forward in the forthcoming years. Certain positive changes may be quite costly, others relatively cheap – particularly when it comes to many institutional improvements.

“L’union fait la force”(“unity makes strength”) is an old proverb in a number of countries. These words are still valid – also in the Europe (EU) of today and tomorrow.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Europe’s chance in China

April 7, 2017

President Trump met most recently his counterpart in China, President Xi Jinping. Regardless what the outcome of these meeting really turns out to be,Trump has not started up his relations with China in a friendly way. That’s certainly how the Chinese feel right now.
One may mention, for example, that Trump has accused China of
– of conducting unfair trade policy,
– of manipulating its currency,
– of having “invented” the global environmental crisis,

Furthermore, China has criticized Trump for his verbal support of Taiwan.

There is no doubt that the EU and a number of EU countries could benefit from these Chinese-American tensions. China indeed would like to enlarge its relations with Europe and European companies.
But China would also like to see a more reforming and harmonizing EU. My impression from visits to China and from talks with the Chinese is without doubt that they consider the EU as an underperforming institution with serious efficiency problems (which certainly is the case to a high extent).

China also dislikes some possible protectionist EU action caused by governmentally subsidized Chinese acquisitions in the EU. It is, however, remarkable that already 2500 Chinese companies can be found in Germany (source CHKD Germany) – mass entrepreneurship not only in China but also to some extent outside China, e.g. in Germany.

The conclusion of these reflections is that internal improvements of the kind described above would be good for the EU itself, Sweden included, but also for relations and business of the EU with the rest of the rest of the world – particularly with the economic giant of China, the largest economy at some point in the (foreseeable) future.
The EU should take this chance now!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Giving Asia Its Due in Global Financial Regulation *

January 10, 2017

With US inward turn, China should get a bigger role to bolster system

Global cooperation on financial regulation has become increasingly important and valuable over the last decade, but its effectiveness cannot be taken for granted. Following November’s U.S. presidential election, Asia, and particularly China, needs to take a more central role to ensure the viability of the global system.

Compared with other modes of international economic cooperation, the global financial regulatory system is in a nascent stage of development. It is made up of a network of diverse organizations and groupings, many of them without legally binding authority, with the Financial Stability Board acting as a coordinating hub.

This system has grown in importance, particularly since the global financial crisis, and its impact has been overwhelmingly positive. The Basel Committee on Banking Supervision, for example, has helped to limit cross-border competitive distortions resulting from incompatible prudential rules and has been increasingly forceful in monitoring national compliance with its agreed standards. The widespread adoption of the International Financial Reporting Standards Foundation’s accounting principles has greatly enhanced the international comparability of listed companies’ profit statements, even if not yet on a universal basis. The Global Legal Entity Identifier Foundation has opened the way toward universal interoperable financial data formats by issuing codes to transaction participants that function in a way comparable to the internet protocol addresses that underlie the World Wide Web.

Such arrangements are even more valuable as the global financial system becomes increasingly multipolar and interconnected, enhancing the need for joint work by public financial authorities on a commonly agreed basis.

Aside from the above organizations, key participants in the regulatory system include treaty-based organizations such as the Bank for International Settlements, which hosts the Financial Stability Board, the International Monetary Fund, the World Bank, and the Organization for Economic Co-operation and Development and its Financial Action Task Force. These are complemented by independent groups such as the International Organization of Securities Commissions, the International Association of Insurance Supervisors and the International Forum of Independent Audit Regulators. The roots of the treaty-based institutions can be traced to the second quarter of the 20th century, but none of the other entities in this global network are more than 45 years old.

The global financial regulatory system has long been lopsided and in need of change as the emergence of new financial powerhouses, particularly in Asia, has challenged the dominance of North American and European states.

Significant improvement has flowed from the 2008 shift to tackling financial and economic issues at Group of 20 leaders’ summits from Group of Seven nation summits. The membership ranks of the Basel Committee and the Financial Stability Board, for example, have been expanded to include major emerging economies and financial centers.

But blatant imbalances remain. On a recent count, all but one of the 27 most senior leadership positions in this system were held by nationals from North Atlantic countries. Almost all entities in the network are similarly headquartered in the North Atlantic region, the only exception being the soon-to-be-established permanent secretariat of the International Forum of Independent Audit Regulators in Tokyo.

Challenges ahead

The system’s institutional fragility is about to be tested by the incoming administration of U.S. President-elect Donald Trump. His “America first” stance will surely create multiple challenges for all international cooperation frameworks, and financial regulation will be no exception.

The response to this test should include an accelerated rebalancing and reform of the global regulatory system to ensure its viability in the new environment. Asia, and specifically China, should claim a much more central position in the system than is currently the case and other nations should facilitate this evolution.

Specifically, China should propose highly qualified officials, of which it has an increasing number, for positions of leadership in global financial regulatory bodies and engage more proactively in their various workstreams. As with action against climate change, and given Europe’s current internal difficulties, China is fast becoming the indispensable anchor for sustainable joint efforts at the global level and should invest accordingly in its representation in global discussions.

In this context, Europe should streamline its presence in the system, as a logical consequence of its own ongoing reform and thus leave room for greater Asian and Chinese leadership. Specifically, Europe’s banking union implies that the representation of individual euro-area countries in bodies in charge of financial stability has become anachronistic and should be replaced by euro-area or EU-level participation. The Basel Committee is a case in point. Now that banking supervisory policy has been comprehensively pooled within the euro area, the separate membership of Belgium, France, Germany, Italy, Luxembourg, the Netherlands and Spain should be phased out.

The relevant bodies should then demonstrate their continued relevance by further improving the system’s effectiveness, even if the new U.S. administration does not initially join some of the resulting initiatives. For example, the Bank for International Settlements, IMF and others should further harmonize formats for financial statistics and data collection. Global regulatory standards should be forcefully developed in new areas in which their need is increasingly evident, such as derivatives. And steps should be considered toward establishing a global level of supervision for limited but critical segments of the financial system, starting with those with no likely fiscal or quasi-fiscal impact in a crisis, such as credit rating agencies or audit firms.

The events of the past decade have amply demonstrated the need for strong global regulatory and supervisory arrangements to keep the inherent risks of cross-border financial integration in check. The prospect of a more unilateralist America should force a rapid realignment in China, other Asian countries and Europe, so that the existing, beneficial financial regulatory system is not left to unravel.

Nicolas Veron
Senior fellow at Bruegel, an economic think tank in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington.



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* Both the author and Nikkei Asian Review gave us the permission to re-print the article. Thanks to them. The article was initially published on December 26, 2016.