Merkel in China

Sanjaya Baru

27 August 2012

 




NEW DELHIGerman Chancellor Angela Merkel’s second visit to China in a year comes against the backdrop of dire forecasts of a difficult September for the eurozone. Mindful of such concerns and persistent pessimism in global financial markets, Merkel is now taking bold political initiatives at home and overseas. Indeed, her China trip should be seen as an effort to assert leadership across the eurozone.
 
 
 

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At home, Merkel recently sent out a clear message to her critics that Germany must pay a price for eurozone leadership. She cautioned her colleagues against loose talk about a “Grexit” – Greece’s exit from the eurozone – and assured visiting Greek Prime Minister Antonis Samaras that Germany remained committed to his country’s membership of the eurozone.
 
 
 
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While it required courage to take such a tough stance, doing so helped to bolster her position at home and throughout the eurozone. There is now no doubt that Merkel is willing to commit Germany to the cause of preserving both the European Union and the eurozone, and that she will work to achieve that goal. If she succeeds, she will emerge as the first great European leader of the twenty-first century.
 
 
 
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This stance suggests that Merkel appreciates the essence of the argument that François Heisbourg, the chairman of the council of the International Institute for Strategic Studies (IISS), advanced in a recent essay: a federal arrangement does not fall apart because of problems at the periphery but because of “failure at the heart of the system.” Merkel has come to terms with Germany’s position – and that it must act to preserve the unity of the whole.
 
 
 
The eurozone (and probably the EU) cannot be saved in Greece or Finland if it cannot be saved in Germany. Committing Germany to that objective is precisely what Merkel has defined as her political goal for the rest of her term in office.
 
 
 
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Within hours of declaring her leadership at home, Merkel announced her visit to Beijing. The timing was highly significant: Merkel goes to China, the emerging global power, after declaring her own commitment to strengthening the eurozone, if not the EU as a whole, as a credible pole of an emerging multipolar world.
 

 
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In recognition of Germany’s growing significance, Chinese Prime Minister Wen Jiabao welcomed a delegation of German business leaders to Beijing this May with the words: “Stronger Chinese-German cooperation is good for the two countries, good for China-EU relations, and good for world prosperity and stability. The strategic dimension of Chinese-German relations, therefore, can only be strengthened, not weakened.”
 
 
 
 
There are several dimensions to the bilateral relationship. Germany needs both China’s markets and the funds that its government can deploy to purchase German and European bonds. It also has more than 7,500 enterprises operating in China, with gross investment totaling $18.5 billion. Moreover, Germany has sold $15 billion worth of technology to China, and bilateral trade hit a high of $169 billion in 2011, accounting for 30% of total China-EU trade. The two countries have set a bilateral trade target of $280 billion for 2015.
 
 
 
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Trade, however, is not the only immediate concern. Far more important, especially for Germany, is to get China to invest in and hold its bonds. In mid-August, at the First IISS Oberoi Lecture in Mumbai, Klaus Regling, the CEO of the European Financial Stability Facility, underscored the importance of Chinese demand for EFSF bonds and China’s role in stabilizing the eurozone.
 
 
 
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Regling also revealed that there is now increased and frequent coordination between monetary authorities in the United States, Germany, and China, drawing attention to the fact that the “old Triad” of the dollar, euro, and yen may now have been replaced by a “new Triad” of the dollar, euro, and Chinese renminbi. While Regling spoke of an emergingmultipolar monetary system,” his remarks clearly indicated the functioning of a “tripolarsystem.
 

 
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Lying at two ends of that monetary triangle, the eurozone and China have acquired a geopolitical stake in helping each other. Hans Kundnani and Jonas Parello-Plesner of the European Council on Foreign Relations view the China-Germany relationship as one that will shape the overall China-EU relationship. Like many strategic analysts, they worry whether Germany, in pursuit of purely short-term economic interests, might forsake long-term strategic interests and concerns about human rights, environmental problems, press freedoms, and other political and geopolitical issues.
 
 
 
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It is significant, therefore, that German political parties have emphasized the need for Merkel to raise such matters in her talks with Chinese leaders. However, Merkel’s focus may well remain on trade, investment, and currency flows. After all, unless she can turn around the eurozone, her rising profile at home and in Europe could easily wither.
 
 

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What this means is that to secure German leadership of Europe, and her own leadership of Germany, Merkel has to “walk on two legs,” so to speak. She needs to balance both geo-economic and geopolitical factors – both interests and values – in advancing Germany’s relations with China.
 


 
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Sanjaya Baru is Director for Geo-economics and Strategy, International Institute of Strategic Studies (IISS), and the author of The Strategic Consequences of India’s Economic Performance.



Peak cheap oil is an incontrovertible fact
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If the looming global oil crunch has been postponed for another decade or two as widely alleged, this is far from obvious in today’s commodity markets.
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By Ambrose Evans-Pritchard, International business editor
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5:30PM BST 26 Aug 2012
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If the looming global oil crunch has been postponed for another decade or two as widely alleged, this is far from obvious in today’s commodity markets.
Barclays Capital expects a “monster” effect this quarter as the crude market tightens by 2.4m barrels a day (bpd), with little extra supply in sight. Photo: AP




Brent crude jumped to $115 a barrel last week. Petrol costs in Germany and across much of Europe are now at record levels in local currencies.


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Diesel is above the political pain threshold of $4 a gallon in the US, hence reports circulating last week that the International Energy Agency (IEA) is preparing to release strategic reserves.


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Barclays Capital expects a “monstereffect this quarter as the crude market tightens by 2.4m barrels a day (bpd), with little extra supply in sight.


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Goldman Sachs said the industry is chronically incapable of meeting global needs. “It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand,” said its oil guru David Greely.



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This is a remarkable state of affairs given the world economy is close to a double-dip slump right now, the latest relapse in our contained global depression.

 

 
 
Britain, the eurozone, and parts of Eastern Europe are in outright recession. China has “hard-landed”, the result of a monetary shock and real M1 contraction last winter. The HSBC manufacturing index fell deeper into contraction in July.




The CPB World Trade Monitor in the Netherlands show that global trade volumes have been shrinking for the last five months. Container shipping volumes from Asia to Europe fell 9pc in June. Iron prices have fallen by 30pc since April to $103 a tonne.




So we face a world where Brent crude trades at over $100 even in recession. Fears of an Israeli strike on Iran may have spiked the price a bit, though Intrade’s contract for an attack is well below levels earlier this year.



Iranian sanctions may have cut supply by more than the extra 900,000 bpd pumped by Saudi Arabia. Japan’s increased reliance on oil since switching off most of its nuclear reactors has played its part.



Yet the deeper force at work is the relentless fall in output from the North Sea and the Gulf of Mexico, endless disappointment in Russia because of Kremlin pricing policies, and the escalating cost of extraction from deep sea fields.



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Nothing has really changed since the IEA warned four years ago that the world must invest $20 trillion in energy projects over the next 25 years to feed the industrial revolutions of Asia and head off an almighty crunch. The urgency has merely been disguised by the Long Slump.



We learned in the 2006-2008 blow-off that China is now the key driver of global oil prices, with consumption rising each year by 0.5m bpd -- now a total 9.2m bpd in a world market of 90m bpd. Demand is broadly flat in Europe and America.



 
So what will happen when China latest spending blitz gains traction? The regions have unveiled a colossal new spree on airports, roads, aeronautics, and industrial parks: a purported $240bn each for Tianjin and Chongqing, $160bn for Guangdong, $130bn for Changsha, and so forth. Sleepy Guizhou has trumped them all with $470bn. Your mind goes numb.


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What will happen too when car sales in China surpass 20m next year, as expected by the China Association of Automobile Manufacturers?



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Kamakshya Trivedi and Stacy Carlson from Goldman Sachs say a disturbing pattern has emerged where each tentative recovery in the world economy sets off an oil price jump that in turn aborts the process. A two point rise in global manufacturing indexes leads to a 30pc rise in oil prices a few months later.


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Oil has become an increasingly scarce commodity. A tight supply picture means that incremental increases in demand lead to an increase in prices, rather than ramping up production. The price of oil is in effect acting as an automatic stabilizer,” they said. If so, it is “stabilizing” the world economy in perma-slump.



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World opinion has swung a little too cavalierly from the Peak Oil panic four years ago to a new consensus that America’s shale revolution -- and what it promises for China, Argentina, and Europe -- has largely solved the problem.




Much has been made of “Oil: The Next Revolution” by Harvard’s Leonardo Maugeri, who forecasts an era of bountiful supply and cheap oil as global output capacity rises by almost 18m bpd to 110m bpd by 2020.




Sadad al-Huseini, former vice-president of Saudi Aramco, has a written a testy rebuttal, arguing that Dr Maugeri assumes a global decline rate of 2pc a year from oil fields compared to the IEA’s estimate of 6.7pc. There alone lies the gap between crunch and glut.




Much as all the stakeholders in the energy industry would like to be optimistic, it isn’t an oil glut by 2020 that is keeping oil prices as high as they are. It is the reality that the oil sector has been pushed to the limit of its capabilities and that this difficult challenge will dominate energy markets for the rest of the decade,” he said.




The US turn-around has certainly been astonishing. The country now meets 94pc of its natural gas needs. It may ultimately become an exporter. Oil output from North Dakota’s Bakken field and other basins in Texas and Pennsylvania may push US shale/tight oil output to near 5m b/d by 2020, greatly reducing US reliance on imports.




This is a magnificent feat of engineering and panache, a perfect example of why one should never write off the US. American industry is currently paying a fraction of European and Asian prices for gas, an invaluable cost advantage that is spawning a renaissance for the US petrochemical industry. “It is an incredible boom,” says Adam Sieminski, head of the US Energy Information Administration (EIA).



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The shale revolution has profound implications for America’s role in the world and the global balance of power, but let us not get carried away. Oil experts noticed how many crews in the Bakken field were told to stand down when crude prices dipped earlier this summer. “Supposedly cheap shale turned out to be rather expensive shale in that, as soon as Brent fell to $90 per barrel, a large proportion of US shale oil in key regions seemed to lose all its rent,” said Paul Horsnell from Barclays Capital.




Early hopes of a shale bonanza in Poland have been dashed. Exxon has pulled out of the country. China has more promise but exploration has barely begun and the government fears that leaks from the Sichuan basin could contaminate the Yangtze River that feeds so many of the great Chinese cities.




One might add that some of Brazil’s non-shale fields are so far offshore in the Atlantic that helicopters have to be refuelled in the air. The drilling is through layers of salt that blind the imaging technology. Extraction is even harder and more costly than the task that overwhelmed BP at Macondo.



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The proper conclusion is to thank our lucky stars that US shale has helped the world avert an immediate crunch. It buys us a little more time to build a new generation of nuclear power stations -- preferably based on thorium -- and to achieve the Holy Grail of unsubsidised grid parity in solar technology.


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Peak Oil may or may not have been discredited. Peak Cheap Oil remains to haunt us.


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Judgment Day for the Eurozone

Hans-Werner Sinn

27 August 2012
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MUNICHEurope and the world are eagerly awaiting the decision of Germany’s Constitutional Court on September 12 regarding the European Stability Mechanism (ESM), the proposed permanent successor to the eurozone’s current emergency lender, the European Financial Stability Mechanism. The Court must rule on German plaintiffs’ claim that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law). If the Court rules in the plaintiffs’ favor, it will ask Germany’s president not to sign the ESM treaty, which has already been ratified by Germany’s Bundestag (parliament).

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There are serious concerns on all sides about the pending decision. Investors are worried that the Court could oppose the ESM such that they would have to bear the losses from their bad investments.
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Taxpayers and pensioners in European countries that still have solid economies are worried that the Court could pave the way for socialization of eurozone debt, saddling them with the burden of these same investors’ losses.
 
 
 
 
The plaintiffs represent the entire political spectrum, including the Left Party, the Christian Social Union MP Peter Gauweiler, and the justice minister in former Chancellor Gerhard Schröder’s Social Democratic government, Herta Däubler-Gmelin, who has collected tens of thousands of signatures supporting her case. There is also a group of retired professors of economics and law, and another of “ordinary citizens, whose individual complaints have been selected as examples by the Court.
 
 
 
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The plaintiffs have raised several objections to the ESM. First, they claim that it breaches the Maastricht Treaty’sno bail-outclause (Article 125). Germany agreed to relinquish the Deutsche Mark on the condition that the new currency area would not lead to direct or indirect socialization of its members’ debt, thus precluding any financial assistance from EU funds for states facing bankruptcy. Indeed, the new currency was conceived as a unit of account for economic exchange that would not have any wealth implications at all.
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The plaintiffs argue that, in the case of Greece, breaching Article 125 required proof that its insolvency would pose a greater danger than anticipated when the Maastricht Treaty was drafted. However, no such proof was provided.
 
 
 
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Second, Germany’s law on the introduction of the ESM obliges Germany’s representative on the ESM Council to vote only after having asked the Bundestag for a decision. According to the plaintiffs, this is not permissible under international law. If Germany had wished to constrain its governor’s authority in this way, it should have informed the other signatory states prior to doing so. On the other hand, Germany’s representative on the Governing Council is sworn to secrecy, which, the plaintiffs argue, precludes any accountability to the Bundestag.
 

 
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Moreover, the plaintiffs claim that, while the ESM treaty is restrictive in granting resources to individual states, requiring a qualified majority vote, it does not specify the conditions under which losses are acceptable. Losses can result from excessive wages paid by the ESM Governing Council members to themselves, a dearth of energy in efforts to collect debts from countries that have received credit, or other forms of mismanagement. And, because Governing Council and Executive Board members enjoy immunity from criminal prosecution, misbehavior cannot be punished.
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If losses arise, they must be covered by the initial cash contribution of €80 billion ($100 billion), which then would be topped up automatically by all participating countries according to their capital shares. If individual countries are no longer able to make the necessary contributions, others must do so on their behalf. In principle, a single country might have to assume the entire burden of losses. Such joint and several liability, the plaintiffs assert, contradicts the Court’s previous statements that Germany should not accept any financial commitments stemming from other states’ behavior.
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Worse, according to the plaintiffs, although the liability of any country vis-à-vis external partners is limited to that country’s share of capital, this limitation does not apply to other signatory states. It is theoretically possible that a single country could be held liable for the ESM’s total exposure of €700 billion.
 
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Finally, the ESM cannot be considered on its own, but must be seen in the context of the total exposure amount, which includes the €1.4 trillion in bailout funds that have already been granted. In particular, the Target2 credit drawn by the crisis-afflicted countries’ central banks, which already totals almost €1 trillion, should also be taken into consideration.
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Nobody knows how the Constitutional Court will rule on these objections. Most observers believe that the Court is unlikely to oppose the ESM treaty, though many expect the judges to demand certain amendments, or to ask Germany’s president to make his signature subject to certain qualifications.
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It is good that the Court’s decisions cannot be forecast, and even better that the Court cannot be lobbied or petitioned. The European Union can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity.
 
 
 
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Hans-Werner Sinn is Professor of Economics at the University of Munich and President of the Ifo Institute for Economic Research. He also serves on the German economy ministry’s Advisory Council. His book Can Germany be Saved? is one of the most widely read public-policy books in recent German history.