European Monetary Policy and the Euro Lotte Ovaere Fall 2011

The Chinese ‘Horse of Troy’ After Greece and Portugal, now Italy Chinese ‘Horse of Troy’: China buys into some strategic sectors No charity Other BRIC(S) countries also consider support to the Euro Chinese State fund (CIC) buys large quantities of Italian state obligations  scare away speculation Italy has, after Greece, highest debt

‘Reverse colonization’ of Europe Europe is for China one of the most important investment markets: Europe is one of China’s most important trade partners  a lot at stake Thanks to Chinese support  Euro gets more expensive again  relative to Yuan  good for Chinese export because: o European consumers have more purchasing power o End of Euro zone would lead to a lot of currency devaluations in the European countries: income from Europe is worth less then o China also wants to become less dependent of the USA  investing in EU = diversification strategy

Why European Union? European single market enforces economic growth Automatically more monetary and budgetary stability throughout Europe Costs of exchanging currencies and risks associated are dropped Stronger competitive position, improving transparency of prices Stronger image on world level

Downside No longer improving competitive position by devaluation Large budget deficits to support the economy or employment no longer allowed Only options left to ‘play’ with: wages, working conditions and social security Germany was the first to set a bad example! Only after a few years after entering, the Germans spent a lot of money on the re-unification of their country