One by one, it seems, the pillars of conventional economic wisdom are crumbling away. With so much of their intellectual credibility reduced to rubble in the wake of the 2008 crisis, neoliberals could at least until recently claim they had correctly foreseen the path of globalisation in the early-21st Century: the Asian economies, especially those of China and India, would continue to rise and lead worldwide development with consistently strong growth and few, if any, hiccups. This summer, however, yet another tenet of our world-view has come under attack.
There is much debate over the causes of the malaise in the Chinese economy, but the most salient explanation is as political and cultural as it is economic. The country’s development since the reformist premiership of Deng Xiaoping has been astounding, but Beijing’s aspiration to be this century’s superpower means not only continuation but acceleration. It is no longer befitting for the People’s Republic to be the low-cost, low-quality workshop of the world, however lucrative this might be – the Communist Party, ironically, has come to the view that a truly modern nation is best-served by a skilled and affluent middle class. Hence the hasty introduction of stakeholder finance, and hence the equally speedy market crash.
Regardless of the cause, there are two outcomes which have a direct bearing on European policymaking. The first is a challenge to the idea that the EU’s primary export market should be Asia – that future European wealth could be founded on profits flowing westwards from Chinese consumption. Whilst the EU still experiences a huge trade deficit with China, European exports to the People’s Republic increased at an average of 9.8% annually between 2010 and 2014, with imports increasing at only 1.6%. Indeed, as a European Commission document from last year put it, “reducing the bilateral trade deficit [with China] is not about importing less, but exporting more”.
We should not be surprised at the priority the EU-China trade relationship has enjoyed, for it dovetails with so much pro-austerity dogma: cutting public spending leads to an “expansionary fiscal contraction” (in the words of British finance minister George Osborne), with private industry supplying an export-led recovery for the whole economy by filling the gap left by the state. Seven years after the collapse of Lehman Brothers and six years after the first tremors of the Eurozone crisis, after round upon round of austerity, this has manifestly not occurred. The EU desperately needs a major public investment programme (coupled with structural reforms) to ensure the social as well as economic stability that so many of our citizens lack. This is the Keynesian argument that some have been making for years now, but it has acquired a new dimension in light of the troubles in China. Europe can spread its liabilities more evenly by boosting domestic consumption, reducing its reliance on the purported golden calf of Asian growth.
The second point is that Beijing’s weapon of choice to deal with the slump – aggressive devaluation of the yuan, designed to boost Chinese exports – has the potential to scupper the coordinated monetary policies of Western countries still emerging from economic crisis. Last October, the Federal Reserve wound up the longest period of quantitative easing (QE) in US history, a signal to the European Central Bank that it was now a safe time to launch its own €1.1 trillion package, designed to run from January this year until September 2016. As a result, there have been intermittent predictions that the dollar and euro would reach parity by the end of 2015, and despite the most recent blaze of Grexit concerns the two have almost converged, with €1 now worth around $1.10.
There was a tacit agreement on both sides of the Atlantic that it was now Europe’s turn to devalue its currency and reap the rewards of more competitive exports. Naturally, this agreement was founded on the premise that everything would remain largely as it was in the global economy – a premise that has been severely undermined by the Chinese downturn. It is only natural for Beijing to look to the same policy tools as Washington and Brussels to boost its exports, yet this unilateral knee-jerk reaction has the potential to throw off economic recovery worldwide. Undertaken irresponsibly, currency devaluation can be its own form of protectionism.
Whilst investment and reform are perfectly within the power of the EU and member-state governments, there is no easy solution to the currency question. What we have learned from this summer, however, is that the Chinese economy is not the transcendental pillar of growth and stability that many had previous thought. It is subject to the same pressures – and the same policy temptations – as both America and Europe.