CESEE and the Impact of China and Russia
Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 3: The global outlook, a growth strategy for Europe, and the role of China1
This chapter covers three deeply interrelated topics: the global outlook; the views of the IMF on the growth strategy in Europe; and the nature and the role of Europe’s increasing economic links with China. The current crisis in Europe has raised questions about growth prospects for economies in the ‘south’ of the euro area. It comes on the heels of the challenges posed by the emergence of China, to which European economies have reacted differently. But now the deterioration of euro area prospects is challenging China in turn. China is not likely to be able to escape spillovers from the crisis in the euro area – Europe and China are strongly linked by trade and, increasingly, by capital. The problems are interrelated – that much is clear. But it is perhaps less obvious that solutions are also interrelated. We believe that the policies that Europe and China could adopt to remedy their imbalances will also help each other. Hence, authorities in the two economies have a great opportunity. But to see this opportunity, we must first look at the current situation, and the deep forces that have driven us to it. If our remarks about great opportunities sound too optimistic, let us be clear: the world economy is in a very dangerous phase. Major advanced economies are locked in a vicious cycle of weak economic activity and financial stress, with the potential to get much worse. And the room for policy error has simply ceased to exist. The first aspect of the crisis is sovereign debt. In the euro area, sovereign funding costs have soared, despite interventions by the ECB (European Central Bank): yields on Spanish 10-year sovereign bonds are over 6 per cent, and Italian yields have seen peaks over 7 per cent. Spreads over German bonds have increased to the point where clearing houses are demanding higher collateral in order to facilitate trades. Prices for sovereign insurance have increased substantially, and show that the crisis has spread from the periphery to the core.
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