WILL CHINA ALLOW EUROPEAN UNION TO FALL???

In the present context of globalisation and international trade, economies are so linked to the growth of each other. As we have seen earlier in 2007-08s Subprime Crisis, fall of Lehman Brothers clicked the failure of many big names in the world and sentiments of recession were seen across the globe where all economies suffered the growth. World was just recovering from that we had another recession monster looming on the world in the form of EUROPEAN DEBT With a combined population of over 500 million inhabitants, the EU generated a GDP of 16.242 trillion international dollars in 2010 which represents an estimated 26% of global GDP (15.203 trillion international dollars or some 20%, when measured in terms of purchasing power parity). Countries at international level should/will come together for rescuing EU not for the sake of EU, but for their own economies growth and survival. While US itself suffering from low growth (stagnation) and high unemployment problems, the only power in the world that can rescue Euro Zone is CHINA
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EU-China trade has increased dramatically in recent years. China is now the EU's 2nd trading partner behind the USA and the EU's biggest source of imports by far. The EU is also China's biggest trading partner

Trade in goods
 

EU goods exports to China 2010: 113.1 billion (+38% on 2009) EU goods imports from China 2010: 281.9 billion (+31% on 2009)

EU's imports from China are mainly industrial goods: machinery and transport equipment and miscellaneous manufactured articles. EU's exports to China are also concentrated on industrial products: machinery & transport equipment, miscellaneous manufactured goods and chemicals.

Trade in services
 

EU services exports to China 2010: 20.2 billion EU services imports from China 2010: 16.3 billion

Foreign Direct Investment

 

EU inward investment to China 2010: 4.9 billion China inward investment to EU 2010: 0.9 billion

China's pile of $3.2 trillion in foreign exchange reserves, the biggest in the world, keeps growing thanks to trade surpluses and capital inflows. Analysts estimate that China holds about a quarter of its foreign exchange in euro assets, and there are few other places for it to park investments of such a scale.

China in the World Trade Organisation

The EU was a strong supporter of China's accession to the WTO, arguing that a WTO without China was not truly universal in scope. For China, formal accession to the WTO in December 2001 symbolised an important step of its integration into the global economic order. The commitments made by China in the context of accession to the WTO secured improved access for EU firms to China's market. Import tariffs and other non-tariff barriers were sharply and permanently reduced. While China has made good progress in implementing its WTO commitments, there are still outstanding problems. The EU also uses the regular Trade Policy Review of China in the WTO to raise a number of concerns regarding China's trade policy. These include inadequate protection of intellectual property rights, the maintenance of industrial policies which may discriminate against foreign companies especially in sectors like automobiles and barriers to market access in a number of services sectors including construction, banking, telecommunications, and express postal services). Access to raw materials has also been identified as a major trade obstacle as well.

Facts and figures on EU-China trade

China is the second largest economy and biggest exporter in the world Its growth in 2010 was above 10%, and international estimates predict China may be on track to become the worlds biggest economy within the next 5-10 years. Chinas rise as a major global economy was boosted by its WTO membership in 2001, which made it reform and open up its economy. This has provided a platform for China to establish itself as a major global trader and the worlds biggest exporter. o China and the EU are trading more than 1 billion every day Just two decades ago, China and the EU traded almost nothing. Today, they form the Second-largest economic cooperation in the world. In a remarkably short timeframe, their economies have integrated to a point where it is difficult to imagine one without the other. Our bilateral trade in goods reached 395 billion in 2010, almost 100 billion more than the year before. O China has become the fastest growing market for European exports In 2010 our exports to China increased by 37% to reach a record 113 billion. The EU is also Chinas biggest export destination with goods and services amounting to 282 billion. This produced a trade deficit of 168.8 billion with China in 2010, just below the 2008 record of 169.5 billion. This figure fell to 132 billion in 2009, driven mainly by a

drop in imports from China due to the crisis. Europes trade deficit with China is mainly caused by sectors like office and telecommunication equipment, textiles, iron and steel. o About half of China's exports are currently produced by foreign invested companies Neighbouring Asian companies in Japan, Taiwan, Hong-Kong and South Korea play a dominant role in this process, where imported components are assembled in China and then exported as finished products. This is called "processing trade". The role of European enterprises in Chinas processing trade regime, however, is limited. Through better market access, European exporters are well placed to sell more and more of their quality products on the rapidly expanding Chinese consumer market. Although imports from China have surged, Asias share of total EU imports has remained stable over the last decade. o The EU's trade defence instruments cover only around 1% of its total imports from China The EU bases its trade defence instruments on strict and non-political procedures. On 30 June 2011 the EU had 55 anti-dumping measures and one anti-subsidy measure in force against Chinese imports.

Area of concern (why China may not help)

Only 1.7 % of the total flow of foreign direct investment (FDI) into Europe comes from China Although Chinese investments into the EU went up from 0.3 to 0.9 billion in 2010, they only count for 1.7 % of the total foreign direct investment made in Europe. The share of total EU flows of FDI to China stays at a steady 20%, which makes the EUs 27 Member States together one of the top 5 FDI providers to China along with Taiwan, Hong Kong, the USA and Japan. o EU-China trade in services has remained relatively stable despite the crisis EU services imports from China account for 13 to 16 billion over the past three years, while the EU services were around 18 to 20 billion in the same period. This results in an EU surplus of around 5 billion. CHINIES ECONOMY , SELF DEPENDENT o Only 23 of the 22,000 telecommunication licences granted in China since 2001 are those of foreign companies European services companies continue to find it difficult to access the Chinese market. Red tape and lengthy procedures are often the main reason. China maintains investment and ownership caps in many sectors such as banking, construction and telecommunications. Foreign law firms in China are currently not allowed to employ Chinese lawyers and are not permitted to participate in bar exams to gain Chinese qualifications. Here lies the opportunity where China can provide platform to the EU companies to expand their business More than half of all counterfeit goods seized at European borders in 2009 came from China Intellectual property rights infringement remains a serious problem for European businesses in China. Seven out of every ten European businesses operating in China say that they have been the victim of IPR violations. In 2007, European manufacturers estimated that the loss of intellectual property costs them 20% of their potential revenues in China. Rates of counterfeited European products were reported to be around 5-10% of EU companies' turnover in China.

With the China-EU trade increases, further deepening bilateral trade relations since 2004, the EU became China's largest trading partner since theEU share of China's foreign trade has been more

than 15% this year in January to April, the EU is the largest Chinese import and export of top Japanese earthquakes, tsunami, China's imports from Japan decreased, the European Union to replace Japanese In March and April, the first row of China's largest source of imports after the May and June of trade and growth is always in a high state of China is the EU's main export products and tourism, finance, education, and large service the consumer, the EU's dependence on the Chinese market continued to rise.

Seek a breakthrough in China-EU trade away from the crisis

August 2, 2011 Although this year the debt crisis gradually into the cold abyss, but the China-EU trade is another round of hot scenes, bilateral trade volume grew 21.3% to the future, both highly complementary economic structure, strengthen trade cooperation, resolve their differences and friction between the two sides have great benefits, the development of China-EU trade prospects to look forward to. Although the summit of EU leaders vow to save Greece and introduced many measures, but along with the three major rating agencies, like the question of bombing of the euro zone debt crisis in Europe is being further into the cold abyss. However, contrast the first half of this year, China-EU trade is another round of hot scenes. Statistics show that from January to June, total import and export between China and EU reached 265.89 billion U.S. dollars, up 21.3% of which export 1644.8 billion U.S. dollars, up 16.9%; imports 101.41 billion U.S. dollars, up 29.1%, after the financial crisis has created a new record for China-EU trade growth. China's economic restructuring and upgrading in the EU deal with the debt crisis, bilateral trade relations will surely make new breakthroughs. Accelerate the development of general trade Experienced a financial crisis in the world economy gradually stabilized stabilized and the EU's efforts to deal with the debt crisis in the process, starting from November 2009, bilateral trade access to the uplink channel, and gradually go beyond the pre-crisis levels in the last 12 year hit $ 45.82 billion trade records in a single month this year in January, March and May, respectively, to $ 45.96 billion, 475 million and $ 48 billion in continued record results In addition to decline in February, the other month were maintained for more than 20% growth. With the China-EU trade increases, further deepening bilateral trade relations since 2004, the EU became China's largest trading partner since theEU share of China's foreign trade has been more than 15% this year in January to April, the EU is the largest Chinese import and export of top Japanese earthquakes, tsunami, China's imports from Japan decreased, the European Union to replace Japanese In March and April, the first row of China's largest source of imports after the May and June of trade and growth is always in a high state of China is the EU's main export products and tourism, finance, education, and large service the consumer, the EU's dependence on the Chinese market continued to rise.

In trade, the financial crisis, China has been by virtue of labor and resources to undertake the EU's export processing orders, imports of industrial machinery and electronic products and components required for such processing trade in China to the EU the main form of trade the financial crisis After the outbreak of the European Union to reduce the processing orders, general trade in China on the rise in the proportion of EU trade, processing trade in 2010 exceeded exports to the EU to become the most important trade the first half, China's EU export growth of general trade significantly higher than the processing trade, processing trade in the further decline in the proportion of bilateral trade in the trade products in 2010 to become mechanical and electrical products and transport equipment, EU exports to China up to the amount, the fastest growing commodities, reached $ 60.15 billion, respectively, and 317.8 billion, up 21.6% and 72.9%, respectively, the EU accounted for 61.7% of China's total exports of China's export of electromechanical products to the EU has a clear price advantage, not only the largest amount of exports, and the highest growth rate, reaching $ 178.33 billion, increase of 47.8%; transport equipment imports into the EU from China the fastest growing commodities, imports increased by 68.2% in the first half, China and the EU import and export of electromechanical products and transport equipment to maintain high growth in bilateral merchandise trade structure is to advanced high-end development. High economic dependence EU trade with the results of both rapid economic conditions and policy has a close relationship. EU economy battered financial crisis, the European sovereign debt crisis is fueled, to recover quickly and to ensure sustained and healthy economic development of the EU is particularly urgent in this context, the EU member states held a European Union summit The program seeks to address the crisis in Germany, France took the lead out of the financial crisis despite difficulties, but Greece, Portugal, Spain, Ireland, Italy and other countries the risk of sovereign debt crisis remains severe, the EU is still shrouded in the shadow of the debt crisis. In order to avoid members of the country's debt crisis dragged into a new recession, the EU needs to unite for a member of the quagmire of the crisis still help the EU move to help rescue the debt crisis of the EU's economic recovery and increasing foreign demand. To strengthen China-EU trade, the EU has also developed a new trade development strategy to develop trade with China in November .2010, the EU developed a "trade growth and world affairs," the strategy paper, the development of trade relations with China has become the European Union the next five years, the focus of foreign trade policy, which guarantees the foreign trade of China and the EU sustainable development, and in the post-crisis era continue to achieve new breakthroughs. China's economic development was strong, and face the task of economic restructuring and upgrading, for raw materials, advanced technology, high-end equipment has a wide range of needs, this is a substantial increase EU exports to China's economic conditions, while China and the world's most advanced the two economies, the EU and the United States to maintain sound economic and trade relations between the two can form a balance between reduction in the EU or the United States against China's trade policies, to maximize the use of trade for China's economic

development.Recently held 25th China - EU economic and trade committee and the two sides held the second half of the 14th China-EU Summit and 4 th China-EU economic and trade of high-level dialogue for the development of bilateral trade and political protection . Expansion of European imports also help to reduce the foreign exchange and RMB appreciation pressure quantitative easing of U.S. monetary policy the dollar devaluation, China's massive dollar assets fell sharply; European sovereign debt crisis the EU for the restoration of economic depreciation of the euro has a tendency to affect the real income of China's euro reserves, while China's trade, capital surplus and huge foreign exchange reserves continued to pressure to revalue the renminbi appreciation is obviously not conducive to rapid and stable development of China's economy and smooth transition through the development and the EU trade, strongly increasing imports, China's reserves to reduce pressure loss and appreciation of the effective way. Fear of the impact of the debt crisis export Although the recent China-EU trade has grown rapidly, but still face the old and new risk factors, of which the debt crisis in Europe is the biggest risk lies. Recently, three international rating agencies frequently cut euro-zone countries of sovereign credit or a bank credit rating, causing the market for sovereign debt crises in Europe worry about the deterioration of the world's major stock markets and international commodity price volatility. As Europe has overtaken the United States China's largest export market, if the debt crisis worsening, the trend is bound to affect the European economy, resulting in import demand for Chinese exports to the EU market impact. Meanwhile, EU trade friction of the situation is still grim EU in the economic recovery process in order to enhance their export competitiveness, export products to China frequently initiated antidumping, countervailing and other lawsuits, the abuse of trade remedy measures,Impose carbon tariffs seek to regain their trade protection policy. Despite the constraints of WTO and other multilateral institutions, and will not have serious trade protectionism, but this will increase trade friction, to adversely affect the development of China-EU trade. In addition, exchange rate volatility also increases the risk of trade, whether it is sovereign debt crisis of the EU aid too much money to market, depreciation of the euro initiative, or to achieve the EU trade balance and reduce trade deficit with China in mind, the appreciation of RMB pressure will result in greater volatility in the exchange rate of RMB and the euro, so that importers and exporters of expected future earnings uncertainty increases, affecting the development of ChinaEU trade. Looking ahead, while the development of China-EU trade will not be easy, but with China and the EU as the world has a wide influence on the economy, both economic structure of highly complementary, strengthening trade cooperation, resolve differences and friction on both sides with great interest the development of China-EU trade prospects to look forward to

The failure of austerity and pretence

A rescue must do four things fast. First, it must make clear which of Europes governments are deemed illiquid and which are insolvent, giving unlimited backing to the solvent governments but restructuring the debt of those that can never repay it. Second, it has to shore up Europes banks to ensure they can withstand a sovereign default. Third, it needs to shift the euro zones macroeconomic policy from its obsession with budget-cutting towards an agenda for growth. And finally, it must start the process of designing a new system to stop such a mess ever being created again

SO GRAVE, so menacing, so unstoppable has the euro crisis become that even rescue talk only fuels ever-rising panic. Investors have sniffed out that Europes leaders seem unwilling ever to do enough. Yet unless politicians act fast to persuade the world that their desire to preserve the euro is greater than the markets ability to bet against it, the single currency faces ruin. As credit lines gum up and outsiders plead for action, it is not just the euro that is at risk, but the future of the European Union and the health of the world economy. It is a sobering thought that so much depends on the leadership of squabbling European politicians who still consistently underestimate what confronts them (see article). But the only way to stop the downward spiral now is an act of supreme collective will by eurozone governments to erect a barrage of financial measures to stave off the crisis and put the governance of the euro on a sounder footing. In this section y y y y
How to save the euro Justice delayed Good fences Out with the old
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Political policy Financial rescue plans Economic policy Domestic policy Germany

The costs will be large. Few people, least of all this newspaper, want either vast intervention in financial markets or a big shift of national sovereignty to Europe. Nor do many welcome a bigger divide between the 17 countries of the euro zone and the EUs remaining ten. It is just that the alternatives are far worse. That is the blunt truth that Germanys Angela Merkel, in particular, urgently needs to explain to her people. The failure of austerity and pretence A rescue must do four things fast. First, it must make clear which of Europes governments are deemed illiquid and which are insolvent, giving unlimited backing to the solvent governments but restructuring the debt of those that can never repay it. Second, it has to shore up Europes banks to ensure they can withstand a sovereign default. Third, it needs to shift the euro zones macroeconomic policy from its obsession with

budget-cutting towards an agenda for growth. And finally, it must start the process of designing a new system to stop such a mess ever being created again. The fourth part will take a long time to complete: it will involve new treaties and approval by parliaments and voters. The others need to be decided on speedily (say over a weekend, when the markets are shut) with the clear aim that European governments and the European Central Bank (ECB) act together to end todays vicious circle of panic, in which the weakness of government finances, the fragility of banks and worries about low growth all feed on each other. So far the euro zones response has relied too much on two things: austerity and pretence. Sharply cutting budget deficits has been the priorityhence the tax rises and spending cuts. But this collectively huge fiscal contraction is self-defeating. By driving enfeebled economies into recession it only increases worries about both government debts and European banks (see article). And mere budget-cutting does not deal with the real cause of the mess, which is a loss of credibility. Italy and Spain are under attack not because their finances have suddenly deteriorated, but because investors fret that they may be forced to default. For this loss of confidence, blame the pretence. Europes leaders have repeatedly denied that Greece is insolvent (when everyone knows it is), failing to draw a line between it and the likes of Spain and Italy, which are solvent but short of liquidity. The excuse is that a Greek restructuring may cause contagion. In fact denying the inevitable has undermined pledges about solvent governments. Instead of austerity and pretence, a credible rescue should start with growth and, where it is unavoidable, a serious restructuring of debt. Europe must make an honest judgment about which side of the line countries are on. Greece, which is unambiguously insolvent, ought to have a hard but orderly write-down. The latest, inadequate plan for a second Greek bail-out, agreed at a summit in July, should be thrown away and rewritten. But all the other euro members (and on present numbers Portugal is just about in the solvent camp) should be defended with overwhelming financial firepower. All the troubled economies, solvent or insolvent, need a renewed programme of structural reform and liberalisation. Freeing up services and professions, privatising companies, cutting bureaucracy and delaying retirement will create conditions for renewed growthand that is the best way to reduce debts. How to prevent contagion? A Greek default would threaten many banks, not just in Greece: this week the markets took aim at French banks that hold southern European debt. Moreover, solvent countries need a breathing-space to push through reforms. That points to agreeing to two measures at the same time: a scheme to shore up the banks, which may take months to put into practice, and a rock-solid promise to support solvent governments, which has to be immediate. The recapitalisation of Europes banks must be based on proper stress tests (which should this time include possible default on Greek sovereign debts). Some banks may be able to raise money in the equity markets, but the most vulnerable will need government help. Core countries like Germany and the Netherlands have enough cash to look after their own banks, but peripheral governments may need euro-zone money. Ideally that

would come from the European Financial Stability Facility (EFSF), whose overhaul was the most useful thing to emerge from the July summit. But it also makes sense to set up a euro-zone bank fund, together with a euro-zone bank-resolution authority. That is part of the longer-term institution building. However, the ECB could help the banks by giving a commitment to provide unlimited liquidity for as long as it is required, rather than a rolling six months, as now. The great firewall of Europe None of this will work unless the Europeans create a firewall around the solvent governments. That means shoring up euro-zone sovereign debt. Spain and Italy owe 2.5 trillion. What if the markets suddenly took fright over Belgium or France? Some have argued for a system of Eurobonds in which every countrys debt is backed by all. But the political oversight to ensure that high-spending countries do not fritter away other peoples money would take years to sort outand one thing the euro zone does not have is time. The answer is to turn to the only institution that can credibly counter a collective loss of confidence on such a scale. The ECB must declare that it stands behind all solvent countries sovereign debts and that it is ready to use unlimited resources to ward off market panic. That is consistent with the ECBs goal to ensure price and financial stability for the euro zone as a whole. So long as governments are solvent and the bank sells the bonds back to the market after the crisis, this does not amount to monetising government debt. In todays recessionary world, the ECB could buy several trillion euros-worth of bonds without unleashing inflation. Even so, this is a huge step. The ECBs German officials have taken to resigning in protest at the limited bond-buying undertaken so far. They fear not only that so young an institution is vulnerable to a loss of credibility, but also that the ECB, which is independent but unelected, could become embroiled in political decisionsespecially by declaring a state insolvent and cutting it off. Both these longer-term risks are real, but they are far outweighed by the need to stop the rot. It would be a nonsense if the ECBs dogged defence of monetary rigour led, say, to an Italian default and a global depression. A bad deal or a much worse one? Put our plan to many Europeanscreditor Germans, debtor Greeks or Eurosceptic Britonsand they may moan that this is not what they were promised when the euro was set up. Completely true, and sadly irrelevant. The issue now is not whether the euro was mis-sold or whether it was a terrible idea in the first place; it is whether it is worth saving. Would it be cheaper to break it up now? And are the longer-term political costs of redesigning Europe to save the euro too great? The sobering truth about the single currency is that getting in is a lot easier than getting out again. Legally, the euro has no exit clause. If Greece stormed out, and damn the law, as it might yet have to do, it would suffer a run on its banks, as depositors withdrew euros before they were forcibly converted into devalued new drachma. It would have to impose capital controls. Greek companies with international bills would risk bankruptcy, as they would suddenly be without the cash to cover them; and the pressure on other

wobbly countries would increase. That is why we favour restructuring Greece, but letting it stay in the euro. If, on the other hand, a strong country like Germany walked out of the euro, probably taking other strong countries with it, the result would be just as terrible. The new hard currency would soar, hitting German exporters. Turmoil in the rump of the euro zone would batter export markets just as the norths firms became less competitive. German banks and companies, in a mirror image of what would happen in Greece, would suffer from the sudden devaluation of euro assets outside the new hard-currency zone. And the rump might still break apart, as Italy or Spain would not want anything to do with Greece. Amid the debris of broken treaties, wild currency swings and bitter recriminations, Europes single market could collapse and the EU itselfthe rock of the continents post-war stabilitycould start to crumble. Attaching hard numbers to any of this is difficult. Analysts at UBS, a bank, reckon that euro break-up could cost a peripheral country 40-50% of GDP in the first year, and a core country 20-25% (see article). Yes, that is a guess (as are the various estimates for the ongoing costs of break-up and those of a bail-out in future years). But the immediate bill for a break-up of the single currency would surely be in the trillions of euros. By contrast, a successful rescue would seem a bargain. Add together the money already spent on rescues, to what is needed to recapitalise European banks and any potential losses to the ECB, and the total will still only be in the hundreds of billions of euros. If the ECBs intervention is bold and credible it might not even have to buy that much debt, because investors would step in. In short, the euro zone would be reckless to flirt with collapse when an affordable rescue is possible. German taxpayers might accept that the immediate costs of our rescue plan are smaller than break-up. But what they detest is the idea that it might let feckless Italians and Portuguese off the hook. Safe in the knowledge that the ECB stands behind their bonds, they may shy away from reform and rectitude. Two risks flow from this. The immediate (and real) one is that furious Germans will demand that Greece is thrown out (or bullied out) of the euro to frighten the others. Such a horrific event would indeed scare Portugal and Ireland, but a threat to expel Italy or Spain is empty: they are too big and too tightly tied into the EU. Simply chucking out Greece because it was convenient would permanently undermine the security of small members of the EU. Besides, once Greece defaults and restructures, its economy stands a good chance of making a credible start on its long journey to economic health. The longer-term risk has to do with more Europe. Fans of political integration say that the only way to enforce discipline is to create a United States of Europe (see Charlemagne). Perhaps a fiscal union that would supervise the issuance of common Eurobonds? Or a new supervisory role for euro-zone governments, or, heaven forbid, the useless European Parliament? Somewhere behind this also looms the idea that the ins will now be able to boss around the outs. The ten countries, including Sweden, Poland and Britain, that kept their own currencies may face a choice: to join the euro or be excluded from a new core Europe, which in effect starts setting policies. And, this

being Europe, there is every chance that the politicians will try to avoid discussing a lot of this with their electorates.

Explore our interactive guide to Europe's troubled economies

The Economist concedes that our rescue plan begins with a democratic deficit that needs to be fixed if steps towards closer fiscal union are to work. But there must be ways for good governments to force bad ones to keep in line that do not require the building of a huge new federal superstate. The Dutch have suggested a commissioner in Brussels with power to veto countries fiscal excesses, and to impose his judgments by law. Mrs Merkel has talked of giving the European Court of Justice the right to impose good behaviour. These are big stepsmake no mistakeand because they involve treaty changes they would have to be sold to voters. But they are a long way short of a United States of Europe. Mrs Merkel, its time to explain the choices The outs, in particular, may still be nervous about all this. So frankly is this newspaper. But the alternative may be the collapse of not just the single currency but the single market and the whole European project. The euro has reached the point where nobody is going to get what they wantsomething that needs to be spelled out to the Germans more than anybody. Over the past 18 months they have grudgingly supported halfrescue after half-rescueand the bill has gone up. In the end confidence and credibility are all. For the ECB to stand behind less prudent countries may be unwelcome to Germans; but letting the euro fall to bits is much, much worse. Spell that out clearly to your voters, Mrs Merkel.

In the next few weeks we are sure to see the markets intelligent side at fore as it closely scrutinizes EUs endeavors to rescue Italy.

If the former is unimpressed then the fools shall be back again with a sell-off, this time at a much larger scale. Does EU have a chance to prevent that? I give my 2 cents. Italy is Europe's fourth largest economy and has more than US$ 2 trillion in debt. Going by the sizes of EUs previous bailouts for Greece & Co. along with the growing discontent among EU peripherals (especially Germany), it is highly unlikely that Eurozone can put together a bailout sufficiently large enough to comfort the markets and rescue Italy (even though they have started buying Spanish and Italian bonds from the secondary market).

After seeing the downgrade of USs credit rating, the core countries shall be very conscious of the threat to their own AAA ratings if they over-stretch in their commitment to the bailout. Lehman Brothers were considered Too Big to Fail; I feel that Italy can be aptly called Too Big to Save. If they go down like other failed peripheral economies, it would be reasonable to expect Spain will probably follow too, which would certainly trigger a chain reaction across the global financial markets. Along with markets deeply in red and rock bottom consumer sentiments, the financial Armageddon is almost certain to cause the breakup of the Euro. So what are the options in front of European lawmakers (many of whom are surprisingly on vacation at this point in time) to send positive signals to a very jittery global market whose nerves have already been freckled to the limit by the debt issues and recovery concerns in US over the last few days ? I see only two ways (Warning: None of these are going to make German Chancellor Angela Merkel any happier) 1. Breakup of the Euro: There are two Eurozones in European Union. The core countries led by Germany and France and the peripherals like Greece, Portugal, and Spain etc. The former are on various degrees of growth trajectories while the latter are in all sorts of fiscal mess with almost stagnant growth rates. Having their own currencies shall enable the peripheral nations to devalue their way out of trouble which is a luxury an appreciating Euro doesnt allow them. The breakup of the Euro can be done in one of two ways: (i) Each country goes back to their own currency (Germany to Deutschemark, Italy to Lira etc.) or (ii) the core nations have one currency while the peripherals have another (say Euro 1 and Euro 2). Either ways, the ability to manage their currency in accordance with their economic metrics shall lead to growth of the currently stagnant EU member nations in the long run. 2. Issuance of Eurobonds: A look at the spreads at which Spanish and Italian bonds are trading at the moment would show that unsustainably high borrowing costs these nations face if these countries go to the markets to raise more debt. At the same time, as I mentioned earlier, the EU cant put together a bailout that can get Italy out of its troubles. Issuance of Eurobonds can solve both these problems. As an MBA student, the definition of Eurobond I learnt in my class was A bond issued in a currency other than the currency of the country or market in which it is issued. Clearly this term came into existence before Eurozone got created. By Eurobonds here I mean Euro denominated bonds issued by ECB and guaranteed by all the member nations (thereby spreading the credit risk around Eurozone). Due to the currency they are denominated in and the underling support from the member nations, the market is likely to react positively to them. In fact they might become the next risk-free rate benchmark now that the USs credit rating has been downgrading. Needless to say, the core countries (especially Germany which has been firmly opposing this idea for a while now) shall not be happy and rightly so. It is like one guaranteeing her irresponsible and broke brothers debts which shall not give him any incentive to mend his ways. The proposal is likely to spark and fierce political debate and public protest in the core nations and shall be a tough one to get a consensus on.

While I dont rule out a breakup of the Euro before 2025, it would be a logistical nightmare and shall take EU members years to get things systematically on track. That is something these countries can ill afford at this point in time. More importantly the European lawmakers are too proud to admit that the creation of Eurozone based on geographical proximity of nations instead of their fiscal metrics was a BIG MISTAKE and shall not let the Euro break up until they are left with no other choice. Luckily for EU, they have a choice right now Option No. 2, which would no doubt be tough to table but is their only way to go if they want to prevent a global meltdown and more importantly (from their standpoint), be around for the next few years.

This brings us to the obvious question terms offered on the Eurobonds. Well an issuance of such massive size and offer terms (like multiple nations as guarantors) would be unprecedented in history and I might be completely off here. even more so because there shall be many subjective factors that have to be taken in account). Nevertheless I make a brave attempt. Issuer: European Central Bank Security: Guaranteed by EU sovereigns

Ranking: Senior Secured Issue Ratings: AAA/AAA/Aaa (S&P/Fitch/Moodys) Issue Size: This number shall be a function of a lot of political and macroeconomic factors and can range from anywhere from EUR 100 billion to EU 200 billion (maybe even more). Maturity: 2022 and 2042 (10 years and 30 years). I expect a short-term and a long-term bond to be issued together Coupon: Around 4.75% for 10Y bond and around 6% for 30Y bonds (based on the AAA-rated Eurodenominated bonds issued by EU sovereigns) Bookrunners: Top European banks Key creditors: Everybody from Sovereign Wealth funds to Pension funds & Endowment funds to top banks of various countries to hedge funds to HNI clients of Private Banks shall be vying to get a piece of the offerings. China would probably sink its teeth into a major chunk as the country shall look to diversify its investments away from both the US and the dollar. Middle Eastern countries too shall try to stack up as much as they can using their petro dollars (through their SWFs) as they look to become creditors of Europe. For them this move would have more political and diplomatic significance than economic rationale. Needless to say that in such a high stakes game the book building by the bookrunners shall be extremely important which is why I expect top European Banks to be at the helm of this massive task. In addition to bailing out struggling EU peripheral, the Eurobonds shall have the following positive effects for Eurozone:The core countries wont have to dig into their pockets to aid Europes sick children. This shall be good news for their fiscal balance sheets and consequently for their credit ratings. y As the Eurobond shall be denominated in Euro, the currency shall experience sharp appreciation on issue subscription and can strongly put up its case for the position of global reserve currency in front of a world which is searching for an alternative to the US dollar. However, if the peripheral EU countries arent able to implement strict fiscal measures and set their house in order, then this step wont be of much help in the long term. These Eurobonds can buy EU time and prevent it from disintegrating in the short run, but it wont be able to stop the inevitable if the peripherals dont start pulling their weight before the end of this decade. Can they do that? I am not so sure but I hope they prove me wrong. y

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