European debt crisis

In an effort to shore up support for Europe's bail-out plan and make it attractive for Chinese investment, the Chief Executive of the European Financial Stability Facility (EFSF) Klaus Regling held talks with Chinese leaders in Beijing, in the wake of Thursday's deal hammered out in Brussels to scale up the EFSF fund.

The Asian giant has in the past regularly bought EFSF bonds and an estimated one fourth of its reserves are in euro-dominated assets.

At a press conference in Beijing, Regling emphasized the mutual benefit of Chinese investment in eurozone bonds - with China's "need to invest surpluses" - and also pointed out that the investment would be transparent and there would be no strings attached. "There is no special deal and so it is normal conditions and we published those conditions on our website," he said.

Attractive incentives

When the final adjustments are made and the EFSF's new leveraging scheme is presented, it is hoped that it will provide a much more attractive investment alternative to state bonds. Josef Janning, Director of Studies at the European Policy Center in Brussels, said talks between EU member states and China were being held to convince the Chinese of the need to "stabilize their fiscal regimes against the irrationalities of the markets."

Chinese investment, he added, has been largely politically driven and that the Europeans are now aiming at convincing them "that they have a self interest in contributing to the stability of the international system."

Jonathan Holslag of the Institute of Contemporary China Studies in Brussels believes the Chinese will surely invest, as for them it is not a matter of "choice but of necessity … we know that it is very much trying to diversify its investments globally and not only to put all its eggs in the US-dollar basket. It has to participate in some way or another in the stabilization of the euro if it is going to stick to its current monetary policies."

EU's bad image

But he admits that investment in the eurozone might not be as attractive as EU leaders had hoped and that Chinese enthusiasm is probably much lower as well. He says Europe is faced with a major image problem.

"The Chinese have lost all their trust in Europe as a political actor, a leading economy, and as a model for building a welfare state, and social development." Not only have they lost trust, but the Chinese widely "tend to see Europe as a spoiled group of decaying countries that do not really deserve the product of China's hard work."

One of the greatest fears of past and potential East Asian investors is that the eurozone is not stable enough to ensure that lenders get their money back - an understandable concern in the wake of the EU's move to write off at least half of the debt of its financially troubled member Greece.

Making concessions

Liu Liqun, a Professor of European studies at the Beijing Foreign Studies Institute, confirms Chinese skepticism but says China will nonetheless help, albeit not necessarily unconditionally. "If we help, we are going to expect something in return," for example, that the EU end the "political discrimination" against Beijing by repealing its weapons embargo and also by advancing its status to a market economy - demands that European leaders might not be willing to meet.

Guntram Wolff, deputy director of Brussels-based Bruegel, a European economics think-tank, believes the EU could benefit from some concessions. "It is obvious that if you provide money to someone, you are going to want something in return. But it is also possible that the Chinese will be content with the returns from interest and certain structural reforms, for example in Italy and other countries in the eurozone which will ensure the safety of investment. And that wouldn't be such a bad thing."

Experts agree that investment from abroad is merely a short-term solution and that the European Union possesses the strength to pull itself out of its fiscal quagmire alone. In the long run, according to Wolff, it is not money that the European Union is lacking, but a coherent solution to its problems regarding integration and a central body to oversee and regulate the fiscal activities of its member states.

Author: Sarah Berning
Editor: Rob Mudge