This may come as shock to many, but it is in the best interest of Europe that it joins China’s Belt and Road Initiative. Contrary to the anti-China rhetoric, the BRI is not a “debt trap,” but in fact a brilliant vehicle to promote economic growth and geopolitical stability across the globe.
Sri Lanka, the country China critics like to use as an example of Chinese “debt trap” diplomacy, does not think so. According to two economists, Dushni Weerakoon and Sisira Jayasuriya, Sir Lanka’s repayment problems are not of China’s making.
Chinese loans account for only 10% of the country’s total foreign debt. Most Chinese loans are concessional with reasonably good terms, a fixed interest rate of 2%, other fees of 0.5% and average maturity dates of between 15 and 20 years. Though such terms are not as generous as those of Japanese loans, they are not outlandish either, according to the Sir Lankan economists.
Non-concessional loans make up the other 40% and they account for 20% of the total in that category.
The remaining 90% of Sri Lanka’s debt is owed to international financial institutions in the forms of sovereign bonds and foreign-currency-dominated loans. In 2007, the loans totaled US$700 million, but mushroomed to $15.3 billion by 2018.
The proceeds were largely applied in paying off old loans because economic growth stagnated or even declined because of a civil war and lack of measures to spur growth, dis-enabling the economy economy from generating sufficient revenues to repay loans.
As if that was not bad enough, Western or Japanese-owned or controlled financial institutions imposed the “Washington Consensus” loan conditionality, requiring borrowers to adopt austerity measures or refrain from deficit financing during periods of economic slowdown or recessions. According to Columbia University economist and Nobel laureate Joseph Stiglitz, that conditionality was meant to have borrowers repay loans first before spending on stimulus programs.
Insufficient revenues forced Sri Lanka to cut back spending, reducing the size of the public service and other expenditures, sliding further down the growth slope and increasing indebtedness. And on top of this, the weakening global economy caused Sri Lanka’s exports to fall, exacerbating its current-account deficits.
The Sir Lanka narrative can be applied to most if not all developing nations requiring loans from Western and Japanese financial institutions.
According to a BBC News report in November 5, 2018, Africa’s total external debt was $417 billion, of which China’s share was around 20%. In countries in which Western-controlled financial institutions did loan them money, the “Washington Consensus” loan conditionality was imposed. Underdeveloped nations such as Chad, for example, had to get another loan to pay off an existing one, for the same reason as Sri Lanka.
BRI a ‘win-win’ platform
One can argue who benefits more, China or the participating countries. But the fact of the matter is the BRI is a “win-win” for China and the participating countries. China has gained by acquiring markets for its products and countries in which to invest. Participating countries have benefited from accessing Chinese investment and China’s market for their products.
Official Chinese government statistics show that two-way trade between China and BRI participating countries has surpassed $5 trillion, or an average annual increase of more than 17% since the BRI’s inception in 2013. Morgan Stanley has estimated that China has invested more than $100 billion in the participating countries so far and could go as high as $1.3 trillion over the next decade.
Why Europe should join the BRI
In spite of warnings from the European Union and the US, more and more European countries are joining the BRI because it serves their national interests. The latest is Italy, signing a memorandum of understanding with China to join it during President Xi Jinping’s visit in March. Days later, Greece and the 16-nation Central and Eastern European Countries (CEEC) signed a similar agreement during Chinese Premier Li Keqiang’s visit in April.
Indeed, in a meeting last month of Xi, Jean-Claude Juncker, Emmanuel Macron and Angela Merkel meeting in Brussels, the German chancellor openly encouraged Europe to join the BRI. She did not say so just to please Xi, but in fact was stating an observation of realism.
First, President Donald Trump’s “America First” policy is just that, American interests above everyone else’s. Imposing tariffs on EU steel, aluminum and other goods for “national security” reasons is nonsense. The EU has never threatened the US and is indeed one of America’s staunchest allies and followers. Now, Trump is threatening to impose tariffs on $11 billion worth of EU goods because he has accused the supranational organization of “illegally” subsidizing Airbus, the main aviation competitor of Boeing. If Trump maintains the tariffs and follows through new threats, the EU-US relationship will be at risk.
Second, the EU itself lacks the financial toolkit to bring its members out of the economic hole that the US-originated 2008 financial crisis created. EU government’s overall debt exceeded 80% of gross domestic product in 2018, according to US-based consultancy Statista. Some countries’ debt-to-GDP ratios – Greece, Italy and Portugal – exceeded 100%. These debt levels suggest that neither the EU nor its highly indebted member states have muscular fiscal means to mount effective recovery policies.
Nor does the EU has effective monetary policies, since the European Central Bank is holding the bench rate at 0% until the middle of 2019 if not longer.
Third, other economies such as India and Japan are not in a position to buy large amounts of EU exports. India’s economy is relatively small, estimated at around $2.8 trillion as measured in nominal exchange-rate terms. Besides, India is becoming increasingly protective of its domestic industries.
Japan’s economy is even worse than that of the EU, projected to grow by 1% in 2019 and even less in later years. In this regard, it too might not be able to buy sufficient EU exports to make a difference.
So Merkel might be right – Europe has little choice but to cooperate with China and join its BRI. China is not perfect and clearly differs from Europe in terms of history, culture and ideology, but it is not as threatening as the US and some in the EU hierarchy claim.