'Erm...Brussels we have a problem' (Or "If EU did satellites..." Part III)

This week has seen the latest farcical episode in the EU's foray into space. The independent European Space Agency (ESA), which is based in Paris and is building the so-called Galileo satellite navigation system for the EU, was left with egg on its face after the two latest satellites for the system were launched into the 'wrong' orbit. In total, the project has now launched six satellites - two are in the wrong orbit and one, it emerged previously this year, isn't working.

Bad in its own right, but forgivable. We're dealing with some pretty advanced technology after all. Except, as we have chronicled before, this project has been absolutely bedeviled by unfortunate incidents, delays, infighting, poor planning and all sorts of other problems.

To re-cap:

Massive cost-overruns: The cost of completing the project and running it for 20 years (including maintenance) was under the original estimates (from 2000) €7.7 billion, of which only €2.6 billion was to be borne by taxpayers and the rest by private investors. In 2007, following the collapse of the private-public partnership, this cost had risen to € 11.8 billion, all of which was to be borne by taxpayers. In the autumn 2010, leaked information suggested that the cost had risen to a staggering €22.2 billion – again with the entire bill footed by taxpayers. But, it didn't end there…

The Commission all over the place on numbers: In 2010, Industry Commissioner Antonio Tajani denied new cost over-runs, saying “I don't know where these figures come from.” He insisted that the deployment budget (which is only part of the cost) remained at €3.4 billion (not €5 billion as the leaked info suggested). Only a few months later, in January 2011, however, Mr. Tajani and the Commission admitted that Galileo needed not just another €1.5-1.7 billion as was thought in 2010, but an extra €1.9 billion of taxpayers’ cash to cover the booming deployment cost – taking the deployment cost above €5 billion. At the same time, the Commission put the annual operation cost at €800 million (not €750 million as assumed in the 2010 estimate). This means that even €22.2 billion for deployments and running cost was an under-estimate.

Tajani has since announced what he calls “savings” of some €500 million on the huge cost overrun, but frankly, at this point we simply don’t trust any of the numbers coming out of the Commission on this one.

Taxpayers getting hammered: The cost for taxpayers for deployment plus 20 years’ worth of running cost may well have increased by some 750% - from €2.6 billion to somewhere in the region of €20 billion+. Shocking.

Delays: Originally Galileo was to be finished by 2008 – a date that was subsequently pushed back several times due to a series of delays, disruptions and other embarrassments. Between July 2005 and December 2005, the project came to a complete halt as member states and the private investors argued. According to the European Court of Auditors, these six months of doing absolutely nothing added an extra €103 million to the cost of the project. Encouragingly, the project managed to make up some time and the satellites were launched this year. However, with only three of the four previously launched working and this latest setback, the performance of this project leaves a lot to be desired to say the least.

Public-private partnership flawed from the very start: As the European Court of Auditors concluded in a damning investigation, the original public-private partnership proposal was “unrealistic” and “inadequately prepared and conceived.” Symptomatically, the private investors withdrew due to fears over the cost of the project spiralling “out of control” and that they wouldn't outweigh the benefits.

The original estimated benefits delusional: In 2006, the Commission estimated the market for Galileo as potentially consisting of 3 billion receivers and revenues of some €275 billion per year by 2020 worldwide – in addition to potentially leading to the creation of more than 150,000 high qualified jobs in Europe alone. The European Space Agency and others have estimated 3.6 billion users by 2020. These are such delusional assessments that it’s hard to know where to start. Indeed, a 2010 report from the German government admitted that "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term.” And according to American diplomatic cables, released by WikiLeaks, Berry Smutny, the CEO of OHB Technology, a company that has a £475 million contract to build 14 Galileo satellites, is claimed to have said: “I think Galileo is a stupid idea that primarily serves French interests.”

The Indian, Chinese, Russian, Japanese, American markets already crowded: One of the reasons why the idea of “3 billion users” is so ridiculous is that all major players already have, or are in the process of acquiring, their own satellite navigation systems. The newly-redeveloped Russian “GLONASS” system has already been launched, and the Chinese are developing their own Compass/Beidou system (not a global endeavour, but set to deprive Galileo of revenue in China). India’s equivalent technology, IRNSS, will be operational within the next two years. Japan has one too and the US is soon to boast a new generation GPS System (though to be fair, that too seems to be delayed) – GPS being what most people happily use in Europe anyway. Where in the world is Galileo going to get its 3 billion users? Is there a better of example of how the EU is falling behind in the 'global race'?

The Chinese have nicked the frequency: In 2003, China agreed to invest €230 million in the project but pulled out after disagreements. Lo and behold, the Europeans noted that the Chinese government was a little too interested in the security related aspects of the project, and got cold feet. But only after Beijing got its hands on some very useful information. So while Galileo was falling behind schedule, the Chinese were developing Compass/Beidou. Chinese officials told the International Telecommunications Union, the United Nations agency that allocates radio spectrum frequencies for satellite use, that China plans to transmit signals on the wavelength that the EU wants to use for Galileo. In other words, the EU is now in the absurd position of having to ask China's permission to run its secure 'encrypted' signal on Chinese frequencies.

All in all, Galileo has had a sorry history right from the very start. And we suspect we haven't heard the end of it yet...

Does Russia’s gas deal with China change things for the EU?

News just out is that Russia and China have finally signed a gas deal, the negotiations of which have been going-on for a decade. (As the picture above, taken from a Gazprom investor presentation showed, this is something Gazprom has been targeting).

This is a pretty surprising turnaround given that every news outlet was reporting overnight that Russian President Vladimir Putin had failed in his attempts to finalise the deal in his current trip to China which ends tonight.

The key points of the deal are follows:

• The contract will be over 30 years and is unofficially estimated to be worth $400bn (19% of Russian GDP).

• It will see Gazprom supply up to 38 billion cubic meters (bcm) of gas to China per year from 2018. Once further pipelines are complete, this could be expanded to 61 bcm per year. As a comparison, over the past four years Gazprom has exported an average of 157 bcm per year to Europe (including Turkey).

• No official price has been revealed but the biggest sticking point has been that China believed Russia’s price demands were too high. It will be interesting to see if Russia gave in on this point.

• This deal has proved increasingly important for Russia as it looks to shift it’s away from relying on European demand for its energy exports.

What does this deal mean for the EU?

• In the short term, not too much. The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy (the former to sell the latter to buy).

• The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.

• For these reasons, it is unlikely to change the potential impact which EU sanctions would have on Russia. Although of course Russia remains relatively unconcerned by such threats when it knows of the huge divides within the EU on the issue.

• All that said, it is symbolically important and could have longer term impacts. It highlights Russia’s desire to move away from links with Europe. Combine this with Europe’s desire to increase energy security and the relations between the two sides could become increasingly cold and distant. Although, some countries due to geographical proximity (Bulgaria/Hungary) or due to long standing economic links (Germany) will surely continue to have good relationships with Russia.

• It also raises questions over future tie ups between Russia and China. Areas such as payments systems, broader financial markets, transportation and machinery have all been touted as sectors for potential cooperation between the two countries. Again while a long term issue, such ties up may concern the West since Russia and China are currently reliant on their exports in many of these areas. Both the EU and US will need to figure a clearer policy for how to deal with such changes, with the EU in particular in need of updating its policy towards its eastern neighbourhood.

China's divide and conquer approach looks to be paying off in deal on solar panel dispute

China and the EU have finally reached a deal to settle their trade dispute over solar panels, which has lasted for almost an entire year and has escalated significantly over the past few months.

In the end it seems that China’s divide and conquer approach may have won out. The key details of the deal are as follows:

• Price floor of 56 euro cents per watt on European imports of Chinese solar panels. Broadly seen to be around the average price which Chinese solar panel producers have been selling out over the past two years and well below the 80 cents which EU ProSun, the group which launched the complaint, were seeking.
• A limit of 7 gigawatts in capacity imported from China. The total capacity of the European market is thought to be between 10 – 12 gigawatts, of which China currently controls a sizeable majority. This may provide some limit to Chinese control of the market and carves out a chunk for European producers.
• China has agreed to freeze its investigations into European wine and polysilicon according to European officials.

Given the original size of the proposed tariffs (50%+) it does seem that the EU’s Trade Commissioner Karel De Gucht has softened his stance substantially (although this has been happening for some time). This is likely due to the erosion of support for the case in some of the key member states – first Germany (which was never particularly enthused by the idea) and then the Mediterranean states (once China launched its investigation into European wine exports). 

China’s agreement to drop its (largely) retaliatory disputes provide little cover for the aforementioned change in position. It seems the most important factor for EU officials was the cap on the capacity which can be sourced from China. This could prove to be important, but it still allows China to maintain control over a large majority of the market. It also suggests an implicit assumption that European producers can control the rest of the market (far from guaranteed if other emerging market producers see an opportunity to fill the gap created by the cap) and that the market will continue to grow, which European producers will be able to take advantage of – again far from guaranteed with the eurozone crisis and a struggling renewables sector in Europe.

This may though not be the last word in this dispute, after EU ProSun said it will challenge the deal at the European Court of Justice (ECJ). This could take some time to run its course, but as we noted when the dispute started, ostensibly, Chinese solar panel producers do receive huge government subsidies. By the letter of the law then, its possible the ECJ could side with the European producers.

Despite these issues, it’s clear that neither side could really afford to continue with this dispute. The more interesting question now is where this leaves the remaining 17 EU trade disputes which involve China. Has the balance of power shifted? Has De Gucht’s position been undermined by intergovernmental disputes? Ultimately, this may be determined by progress in a new investigation into Chinese dumping in the telecoms market. Watch this space.

China launches official investigation into EU wine subsidies

Trade-war back on.

Well, in fairness, we’re not sure it ever went away. It did seem like relations were improving, however, with EU Trade Commissioner Karel de Gucht saying (following a meeting with his Chinese counterpart):

“I believe that both sides have now engaged in a sincere way to work towards an amicable solution. That is the good news…Let be me very clear again here today in Beijing: Europe wishes for an amicable solution.”

The rest of the speech continued in much the same way, striking a very conciliatory tone. For his part, Chinese Minister for Commerce Gao Hucheng said that the talks had been “positive”.

This all helped raise hopes that a deal could be reached ahead of the August deadline meaning the EU tariffs on solar panels could be (largely) avoided and Chinese retaliatory tariffs on wine would never be more than an empty threat.

Unfortunately, that no longer looks to be the case. The Chinese government has now officially accepted the complaint from its wine industry regarding illegal dumping and subsidies from the EU to its wine producers, saying:

"China's investigation department will strictly abide by China's relevant laws and regulations and meet the demands of relevant World Trade Organization rules…In the investigation process, the Ministry of Commerce will follow the principles of openness, fairness and transparency, fully respect all parties' legal rights, and make a fair ruling based on objective fact and the relevant laws and regulations."

We’re not sure that will provide much comfort to France and other countries which fear the imposition of tariffs.

Needless to say then, it seems whatever talks have been going on behind the scenes have not been fruitful. This spat looks set to escalate, not least because the WTO is likely to turn into a battleground with two of the largest economies trading blows and trying to garner support. With the August deadline just over a month away hopes for an “amicable solution” look to be fading.

The China-EU trade war begins, China adopts divide and conquer approach

As expected, China did not take the new tariffs on its exports of solar panels to the EU lying down, nor did it see it simply as an ‘opportunity to negotiate’ as the Commission suggested.

China has announced that it is investigating illegal EU subsidies to the EU wine industry. The rational is, as the Chinese Commerce Ministry put it, because, "Wine imports from the EU enter our market via dumping, subsidies and other unfair trade practices, and have hit our wine production."

Our headline is of course exaggerated for effect but the main point stands. This dispute has escalated significantly with the retaliation now raising the prospect of a tit-for-tat trade dispute.

It’s also been well documented that the EU is divided on this issue, with quite a few countries (led by Germany) openly expressing their opposition to the Commission’s tariffs. Other more traditionally protectionist countries have been decidedly less vocal. With this in mind, it’s interesting that China has launched an investigation which focuses on a sector heavily located in France and the Mediterranean rather than one in Germany. This could be a mere coincidence, but then it could not.

AFP reports that French President Francois Hollande has called for an EU-27 meeting to be convened to discuss the issue and create a united EU position on it (possibly to counter such a divide and conquer approach).

There are a few other interesting points to note with this investigation:

• The Chinese do have a case given the influence of the CAP, which still provides significant subsidies to farms including vineyards.
• It’s hard to say exactly how large the subsidies are. Under the reformed CAP programme in 2008, National Support Programmes for wine growers totalled €2.8bn.
• As with much Chinese data it’s hard to pin down the exact size of the market. The Commission notes that in 2011 China and Hong Kong together accounted for €1.47bn in wine exports from the EU. This has certainly increased since then as China represents one of the largest growth markets for wine. Reuters suggests that Chinese imports of wine amount to €1bn from France alone.
• Whatever the size, this market is smaller than the solar panel one. EU imports of solar panels from China amount to around €21bn.

EU offers China “window of opportunity” to settle solar-panel row but proceeds with watered down tariffs

Soon to be more expensive?

The EU-China trade row over cheap Chinese solar panels flooding the European market has been raging on for several weeks now and is threatening to escalate into a full blown trade dispute. 

On one side, the EU has firmly maintained that it will impose anti-dumping tariffs. On the other, China has postured that any such move will lead to economic retaliation.

Meanwhile, somewhere in between, a number of EU member-states (led by Germany) have come out supporting China, fearful the row could hamper national trade-interests with the Asian monolith.

Against this increasingly tense background, EU Trade Commissioner Karel De Gucht today presented the Commission’s provisional findings in the anti-dumping case on solar panel imports from China, key points from his press conference below.

• There will be temporary tariffs imposed, which will play out in two phases: 11.8% from 6 June, and 47.6% from 6 August.
• De Gucht maintained that this was a “reasonable” decision that had nothing to do with protectionism. He said that Chinese “overproduction” of solar panels had allowed it to flood the European market with a cut-price product, which, he estimated, should cost 88% more.
• So in the short term, the Commission sees the tariffs on China, in De Gucht’s words as an "emergency measure to give life-saving oxygen" to a threatened EU solar industry. In the long term, the Commission says it is upholding to the principles of fair trade.

Open Europe’s take on the decision:

Although De Gucht is probably correct to say he is simply applying the rules as written, we ultimately believe applying the tariffs at such a high level is the wrong decision for a number of reasons:

• Firstly, solar (and renewable energy generally) is subsidised everywhere to some extent. If it didn’t need to be it would be the obvious energy resource for the whole world. This makes it very difficult to judge what the ‘fair’ level of subsidy is or how the market would look without them.
• In this vein, the whole EU market arose due to significant subsidies and would be unlikely to continue without them in some form (see our previous post for more detail). This makes the claim of protecting jobs and the EU solar industry a bit of a misnomer.
• Consumers will lose out as prices could well rise from this. At the very least they will be presented with less choice.
• Many producers and services built around the wider solar industry could struggle as they have become reliant on the cheap Chinese imports.
• These nuances could show that some competition laws (and not just in the EU) need to be reassessed to account for complex and global markets.
• The potential for retaliation remains concerning. This could cause harm to the EU's significant trading relationship with China at a time when Europe can least afford it.
• As De Gucht himself seemed to note, no decision is made in isolation and the political implications of such a decision should be taken on board. There is also an inherent tension here given that, although the power to judge Competition Policy has be passed onto the EU, Foreign Policy and international relations remain very much in national hands (as they should). Policies which cross this boundary must take account of national preferences in this area.

Where do we go from here?

All that said, the Commission has thankfully left itself with an ‘out’ and rowed back significantly on its original hard line position. Using the staggered tariff rate and the two month period for negotiation eases the impact of the decision. Although, relations will likely be tense in the immediate aftermath.

The Commission insistence that the ‘onus’ is now on China will probably not go down well. Whether China will play ball and reach an ‘amicable’ agreement as the EU wishes remains to be seen. It will certainly make for an interesting summer of negotiations.

Unintended consequences: could tariffs on Chinese imports actually harm the EU's solar panel industry?

The past few weeks have seen a marked increase in hostilities between China and the EU over the ongoing trade dispute, centred on the solar industry. Given that it’s between two of the largest economies in the world, this dispute is not to be sniffed at.

As the WSJ noted last week, the Chinese government has increased its rhetoric against the recent EU trade investigation in illegal subsidies to solar panels imported to the EU from China, while the threat of similar action on telecommunications is deepening the divide. Tensions peaked over the weekend with the Chinese delegation to the EU putting out a press release containing a veiled threat of retaliation if the EU pushes ahead with tariffs and other protectionist measures.

Below we lay out some background and key points on the solar panel case which is driving the dispute.

So what's going on here?

• To recap, last September, DG Trade at the European Commission launched an anti-dumping investigation into whether imports of Chinese solar panels and their components were being given unfair subsidies by the Chinese government. The investigation was launched after a complaint by EU ProSun, a collective of European solar firms. This group is led by the EU’s largest solar firm Solar World. Solar World was instrumental in pushing similar action in the US (which also instituted tariffs).
• DG Trade has announced that imports of Chinese solar panels will face tariffs of between 37.3% to 67.9% from 6 June 2013, although the exact amount will vary from firm to firm (until that date the ruling can of course be altered). This ruling is temporary and the duties are provisional since the investigation (and other similar ones) are still on-going. Once the investigation is complete the findings are presented and the issue is put to the Council of Ministers for a vote on whether to impose permanent duties.

There are a lot of different legal, economic and political points to consider here.  It is clear that the Chinese firms are receiving significant subsidies and by the letter of the law there should probably be some tariffs.

However, this episode obscures a much more fundamental point: the EU’s solar panel market is to a large extent unsustainable. In the early 2000’s Solar firms were given significant subsidies, especially in Germany, and were able to expand rapidly despite being barely commercially viable. Once the eurozone crisis hit, and governments had to start cutting spending, the subsidies dried up.

Ironically, cheap imports from China are likely to have played a significant role in supporting this market as public subsidies in Europe wound down (by helping to bring down production cost). Similarly, given the variety of cheaper options available, solar cannot yet be commercially competitive without some form of government support – be this directly from Europe (which cannot afford it at the moment) or indirectly from China. So, again, ironically, there's a risk that the tariffs contribute to killing off Europe's own solar market - raising questions about the Commission's claim that the tariffs are needed to protect 25,000 European jobs.

This is also a classic example of large firms using their market position to lobby the EU to take action to lock in the status quo. Larger firms such as Solar World are keen on the tariffs and/or other protectionist measures while smaller firms (that are looking to partner up with and import cheap components from Chinese firms) are reluctant.

Finally, whilst the Chinese government isn't exactly whiter than snow, the EU must be very careful not to trigger a trade war - not only would it be economically damaging, but the EU's trade image would also be seriously damaged.

Finding a compromise should be the short term goal, but over the longer term it poses an interesting question over how national policies impact other countries (see also the prospects for currency wars) and what can be done to manage this. This dispute should also force the EU to consider its position on heavily subsidised markets which are very rarely viable over the medium and long term.

So, what next? The dispute is likely to continue, although a statement last night by EU Trade Commissioner Karel De Gucht did show some signs of conciliation. A decision on whether to impose the temporary tariffs will be needed by the 5 June - if they are imposed then the dispute could escalate quickly. These would run until December when the investigation is complete at which point the findings and prospect of permanent tariffs would be put to the Council of Ministers.

Going global: Germany is slowly shifting its trade away from the EU (or why German growth alone cannot save the eurozone periphery)

On top of the release of UK trade data, Germany has also put out its latest trade statistics. As this is Germany we're talking about, the figures are interesting on all kinds of levels.

As the graph above shows German trade has recovered since the start of the year, although exports and imports remain well below their March 2012 levels. Exports have recovered slightly quicker allowing for Germany’s significant trade surplus to widen further.

But where is this new demand coming from? The eurozone remains mired in recession, so there is little chance that the turnaround in trade is being driven within the single currency bloc. Looking at the graph below may provide some clue.

As we can see, of Germany’s top trading partners only five on the import side and four on the export side are from within the eurozone. These are from the end of last year, but with growth in the US picking up and Asia still doing relatively well, it’s likely that much of the upswing in German trade was with these countries rather than the eurozone. This is confirmed to some extent by the table below which shows that trade with non-euro EU countries and third countries was either positive or less negative relative to a year ago.

What’s the significance of all this?

• Firstly, it raises interesting questions about Germany’s role in the eurozone and the crisis. Trade with eurozone countries, especially those in the periphery, is becoming less important for Germany on both the export and import side. The knock on conclusion of this is that even if Germany were to boost domestic demand or import more (as many southern European leaders have called for) it’s not clear it would actually have a huge benefit for the struggling country.

• A report by Deutsche Bank in February found that an additional 1% growth in German GDP would only provide a 0.1% boost to the current account of struggling economies. Far from enough to have any material impact on overcoming the crisis.

• The second interesting point, in terms of the UK-EU debate, is that Germany is proving incredibly successful in cultivating trade with countries outside the EU, despite at times a stifling European regulatory environment (including meddlesome EU rules) and the eurozone crisis. This is likely due to its focus on manufacturing and its strong ‘Mittelstand’ (the undervalued euro also helps). In turn, this suggests the choice presented by some - either you trade with the EU or you trade with the rest of the world - is clearly false. Warts and all, you can cultivate trade with the rest of the world from within the EU - what you need is economic assets which appeal to these fast developing economies. And of course, a more, liberal, outward-looking EU would certainly help as well. 

Beijing beating Brussels at its own game?

Last week in Brussels, we organised a very interesting event looking at trade between the EU and Asia - the importance of which can hardly be over-stated given Europe's, shall we say, current economic predicament.

At the event, Conservative MEP Syed Kamall warned against the EU pursuing an “anti-business agenda” in trade talks, including excessive environmental standards, as “we end up with everything but trade.”

Today, we received another reminder of the dangers involved in the EU pursing green protectionism: other trading blocs may do the same.

From PA we learn that the EU, the US and Japan have launched a complaint at the World Trade Organisation, claiming that China is limiting its export of rare earths. This is a pretty bad situation, as these minerals are vital to the production of high-tech goods, such as hybrid cars, weapons, flat-screen TVs, mobile phones, mercury-vapour lights and camera lenses. And as China accounts for more than 90% of global production of 17 rare earth minerals that are used to make this stuff, Europe is pretty dependent on the trade.

But here's the intricate part, China says it's 'only protecting the environment'. The country's Commerce Ministry said in a statement:

"The Chinese policy objective is to achieve sustainable development in order to protect resources and the environment, and this is not a trade-distorting way of protecting domestic industries."

Tricky. Now, we're certainly not siding with China here, but merely making the humble observation that if Europe continues to flirt with Non Trade Barriers of various sorts, including 'green' ones, others may start to play it at its own game.

Perhaps something to keep in mind when certain EU leaders call for a "buy European act." Sooner or later, chickens could come home to roost.

Seven reasons for optimism?

Swedish Finance Minister Anders Borg – top of the pile in Europe according to the FT – today gave the EU committee of the Swedish Riksdag the lowdown ahead of Monday’s meeting of EU finance ministers (in some countries, lo and behold, ministers are actually accountable to their parliaments for what they say and do at EU summits). Amid all the gloom and doom, Borg outlined seven reasons to now be more optimistic about the state of the European economy:

1. The risk posed by Greece to European banks has been substantially reduced

2. The ECB has taken strong actions

3. The talks with private creditors over a Greek debt write-down are about to be concluded

4. The Italian government is pushing ahead with reforms

5. The Spanish government is pushing ahead with reforms

6. A solid recovery in the US

7. The Chinese government believes that its growth will remain relatively strong in 2012

Enough to believe that the worst is behind us? You decide.

Ps. For some Friday 'entertainment', you may wish to check this out - a rather odd sample of Swedish humour....

Will Beijing get the last laugh?

Stories about Chinese involvement in the eurozone rescue are hardly new, after all China’s sovereign wealth fund, the China Investment Corporation has got over $400 billion in assets to invest, and the eurozone is in desperate need of fresh capital. There are a number of options available; China could invest in infrastructure projects, assist in the bank recapitalisation programme or buy up even more government bonds.

A couple of weeks ago the Sunday Times reported that in return for such investments, China was secretly seeking additional commitments on budget cuts and structural reforms (including on welfare and pensions) among member nations of the currency bloc. The paper cited a source close to the recent G20 talks in Paris as saying: "China wants to be sure that Europe knows the size of the hole and that it won't get any bigger before they agree to fill it in”.

In addition, it has long been speculated that in return for bailing the eurozone out, China could obtain significant political concessions, such as the lifting the EU's arms embargo and be given full market economy status. However Germany's (and Europe's) most widely read tabloid Bild today opted for a more tongue in cheek (although some would say tasteless) take on the matter, which we have included above.

Given the perilous state of the eurozone, we fear that it may be the Chinese who have the last laugh.

EU snoozes and loses Latin American trade?

While the EU wastes time and effort with internal squabbles, is anyone paying attention to its external trade agenda?

Well, to be fair, the Commission has done some decent things in this area lately - the South Korea Free Trade Agreement for one. But a recent report from the United Nations Economic Commission for Latin America and the Caribbean (CEPAL in Spanish) should be cause for concern. It reveals that, if predicted growth targets continue, China is tipped to overtake the EU as Latin America and the Caribbean’s second biggest trading partner in 2014.

According to CEPAL, in 1990, Latin America’s exports to the EU reached 25%, while imports from the EU were 20%. In 2009, this exchange had reduced dramatically to 14% for both exports and imports.

In recognition of this downward trend, last year the EU, under the rotating Spanish Presidency, relaunched negotiations for an EU-Mercosur Association Agreement. An EU-Mercosur deal would pave the way for a new phase in regional trade relations, with the creation of one of the world’s largest free trade zone, boasting a population of 750 million.

Latin America is a key growth market. Mercosur countries’ economies have shown resilience in the face of the international economic crisis, after initial difficulties, the economies are now bouncing back and are expected to grow between 7.5% - 9.5% this year. As their economies grow, so does their negotiating position in international fora. In contrast, the eurozone’s entrenched economic difficulties weaken the EU’s hand. As member states’ austerity measures reduce demand within the bloc, the EU desperately needs to bolster its trade relationship with other export markets.

Negotiations are expected to conclude on 8 July, however, whether or not a deal can be struck remains to be seen. Not unexpectedly, negotiations are tough as both sides must agree to major reciprocal concessions on trade – with focus on industrial products, agriculture and intellectual property rights. A report by the Commission’s Joint Research Centre, conveniently leaked to Reuters this week, claims that European farmers could lose more than €3bn in annual revenue by 2020 and up to 33,000 farm jobs if the current draft EU-Mercosur trade deal is approved. The Reuters article does note at the end, however, that the current deal would bring general net benefits of €4.5bn to both regions.

As the EU’s role in the world becomes ever more faded, it’s more necessary than ever that EU leaders lift their heads out of the sand and focus more energy on trading with the world. The EU cannot afford to snooze and lose Latin America’s trade.

Spain and China: a whirlwind romance gone wrong?

Last week the news was full of talk of a new economic alliance between Spain and China, following Jose Zapatero’s visit to Beijing. Zapatero spoke of promises by the Chinese government to continue buying billions of euros worth of Spanish government debt. There was even some chatter about a substantial $13bn investment by the Chinese sovereign wealth fund (CIC) combined with private investors. It looked like a match made in heaven.

Alas, as with many whirlwind romances (we felt one night stand might be a bit harsh), everything was not as it seemed. As often is the case, one partner (Spain) seemed much keener on the whole arrangement than the other, and went off touting the new relationship to its friends (the Spanish and European media in this case). Unfortunately, the other partner was looking for a more ‘at arm’s length’ type deal and China began to distance itself from the rumours. The whole charade was put down to “an error of communication”.

Spain was eventually forced into a slightly humiliating retraction of Zapatero’s initial statement and an awkward silence has since prevailed. Despite being a slightly comic interlude to the ongoing depression of the eurozone crisis this whole situation highlights that there is no easy answer for Spain. It needs to continue with its economic reforms and spending cuts, and maybe markets will continue to support it. This is especially true now that the hope of finding a sugar daddy to help fund it over the next few years has been ruled out (although we’re fairly sure America has dibs on China’s funding of debt anyway).

(H/T to FT Beyondbrics blog for the brilliant metaphor)

Is China betting on or against Europe?

The role of the Far East in the Eurozone's ongoing debt saga is becoming increasingly fascinating.

China has reportedly bought €1.1 billion of Portuguese debt in a direct sale. And Japan - not wanting to be outdone - has announced that it'll buy €900 million worth of bonds to be issued by the EFSF (the Eurozone bailout fund) at the end of this month.

Bill Gross, who manages PIMCO - the world’s biggest bond fund - dismissed all this action, saying that,

there are claims of Japan and China and so on, but they're really looking for the private institutions like PIMCO and other insurance companies to buy, and we just have not done that yet.

French daily Les Echos has a slightly different take, arguing that "Asia has decided it will save Europe."

But a different analysis altogether comes from leading finance blog Zero Hedge. They write that China's banks are currently switching their euros (which amount to 25% of China's currency reserves) for dollars, meaning that China is actually ditching the Single Currency. The Chinese know that their €1.1 billion "investment" in the eurozone is effectively underwritten by the ECB, which continues to buy Portugese junk bonds.

The result is a temporary increase in the value of the euro relative to the dollar, which allows China to sell their euros for more than if they had not spent the €1.1 billion. The blog estimates that the profit could be in the area of $11 billion. The blog writes:

Here's the math: assuming roughly €510 billion in EUR-denominated holdings, just the last 5 day jump in the EURUSD from 1.29 to 1.31 means that the USD value in a static pool of €-holdings has increased by about $11 billion (on paper). But here's the kicker: it is not on paper, and if the rumors are true, China is actively converting EUR holdings to USD. It appears that the mid-1.31 range is one appropriate exit point. So from an IRR standpoint, China invests €1.1 billion in Euro peripheral bonds knowing full well that the biggest backstopper is the ECB, in essence letting the country frontrun Europe's taxpayers. And in return it gets a marginal improvement in its FX holdings to the tune of $10 billion. In other words, every 100 pips improvement in the EURUSD results in a ~$5 billion boost to the USD valuation of EUR-denominated holdings. And if the latest €1 billion investment allowing the country to "buy" $10 billion in FX gains is any indication, China sure knows what it is doing.

Furthermore, with it allegedly actively selling EURs as a result, it appears that the country is in effect betting against Europe, and is continuing to reduce its 25% EUR allocation, with the USD as a beneficiary.

Speculative, that's true - but does anyone else have the feeling that Europe isn't quite in the ballgame?

China's $300bn request

According to the FT, China has just "raised the price of its cooperation in the world's climate change talks" by demanding that developed countries spend 1% of GDP on transfer funds to poorer nations to help them reduce emissions. For the EU, this would equate to $160bn, and for the US, $130bn. The Chinese conceded that even such large funds "might not be enough".

China has done more than just raise the price for its cooperation - unless this is some kind of ruse, it has thrown a spanner in the works of climate change diplomacy. It is supremely unlikely that the US or Europe would be at all in the mood right now to pledge such enormous sums.

Some transfers will occur through the continuation of the Clean Development Mechanism (CDM) - which allows western governemnts and companies to offset their emissions by buying in permits for apparently 'green' projects in developing countries. But leaving aside the fact that these projects are usually useless or harmful, CDM transfers won't put much of a dent in the amount the Chinese are asking for. If we go with the Commission's estimate that between 2013 and 2020 EU industries in the Emissions Trading Scheme will be allowed to offset around a third of their reduction commmitments through the CDM, this would mean 100-150 million tonnes worth of 'reductions' could be 'imported' in this manner.

Even assuming a relatively high CDM price of $25 per tonne, this would only equate to transfers of just under $4bn. Even if ALL of the reduction commitment under the ETS was to be met through offset credits (which will probably actually happen in the current trading phase), this would imply transfers of about $10bn. There'll be some demand from the non-ETS sectors and national governments, but that won't raise the transfers by more than a few billion dollars worth of permits. It's a long way off $160bn.

In short, what the Chinese are asking for goes way, way beyond the existing mechanisms for transferring (pretty substantial) funds to developing countries to fight climate change. The amount of money being requested is ludicrous and unrealistic and will probably be scaled down, but the principle of asking for large financial transfers is likely to be maintained during negotiations. India has been less brazen, but will probably row in behind the Chinese on this.

As Prof. Dieter Helm (who advises the UK government on energy matters) has pointed out, the rest of the world doesn't regard the EU 20-20 by 2020 targets as realistic or credible (and neither it seems do many EU member states). The EU position is mere “political rhetoric” he says. Bearing in mind this lack of seriousness/ realism on the part of the EU, it's not hard to see why the Chinese want to secure huge sums of cash as a kind of insurance policy before making any binding pledge on carbon reductions.

A Warsaw-Beijing pact on climate change?

According to Reuters, the Poles are calling in some heavyweight support in their bid to outflank the EU on tough new conditions for coal burning industries.

Polish Prime Minister Donald Tusk told a press conference in Beijing Thursday:

"I expect that in China we will find an ally for the global climate talks. We are in a similar situation due to our coal-based economies. We cannot allow fighting climate change to destroy them."

Any global deal on climate change will be close to useless without Chinese backing, meaning Poland's position would be considerably strengthened by any alliance with Beijing on this issue. This follows earlier endorsement for Warsaw from fellow ex-communist EU members and a big western European power in Italy.

As we argued before, the potential for European consensus on climate change policy has undoubtedly been damaged by the overly interventionist and centralised approach adopted by the Commission.

This bodes ill for any EU agreement by the end of the year, and more importantly, any global deal.