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The transformation of China is transforming the world economy as a whole

The economic challenges for Europe and China today

Speech by Herman Van Rompuy, President of the European Council at the China Europe International Business School:

It is a great honour for me to be today at the China – Europe International Business School in Shanghai. I appreciate this opportunity to talk directly to students from both ends of the Silk Road… You represent the driving force for China's and Europe’s future.

I find it very important that the brightest young men and women from Europe and China get an understanding of each other’s cultures. It is about the other's choices and constraints, about his or hers hopes and fears, about human values, about inspiration and motivation, about past experiences and a view of the future. Such knowledge, such mutual understanding one cannot pick up in a travel guide or on a short tourist trip; you need to get a real feeling of a country and its people. Studying together is an excellent way of achieving this. I hope this School lays for many of you a sound basis of friendship and respect between cultures, for the rest of your, hopefully long, lives!

As you probably know, China and the European Union have set up two schools together: yours, and the China-Europe Law School, which opened in 2008. That school, as Premier Wen Jiabao said at its opening, “will form legal professionals equipped with a knowledge spanning Chinese and Western Laws.” Another skill in high demand!

It is not only highly appropriate but also symbolic that the two existing China-EU schools start with the twin themes of Business and Law. Indeed, the Rule of Law is indispensable for the flourishing of any modern economy. It was the secret of Europe’s early economic development five centuries ago, when the idea of a market took hold: the entrepreneurial spirit requires a stable legal framework to produce benefits for a society as a whole. It is a lesson we learn time and again, most recently in the context of the Arab Spring. Sustainable economic and social development and stability cannot exist without the underlying fundamentals of Rule of Law, social justice, and human rights.

The success of these two Schools led to an even bigger vision, the project of bringing them together under the roof of the first Sino-European University. This university could include faculties in other areas, such as journalism and communications, and international relations.

Now that the European Union has its own Service for External Relations, it could be an excellent training ground for future diplomats! I welcome this project: it is an opportunity to improve our cooperation, and a true investment in our shared future.

I was also pleased to learn that your school, founded in 1994, is now China's number one business, school and among the world’s Top-Twenty. I would be proud to belong to such a prestigious institution!

It is perhaps another symbol that the city of Shanghai plays host to the School. The opening up of China's economy in the past three decades has resulted in a tremendous transformation, most clearly on view in Shanghai itself. Yesterday upon landing, I was deeply impressed by the skyline of Pudong. And even more so, when I learned that twenty years ago, where these proud towers now stand, one could only see some empty fields!

The transformation of China, which is your daily bread, is transforming the world economy as a whole. That's why in the European Council of the 27 Heads of State and Government which I chair, we address the issue regularly.

Today I should like to talk about "the economic challenges of Europe and China ": about how we can work better together to create sustainable economic growth and jobs for our citizens, in a world which is ever more interdependent.

I should like in particular to address, in turn:

  • Global economic interdependence and its consequences.
  • The challenges for the Eurozone and the European economies.
  • The bilateral relationship between China and the EU, in trade and other areas, and how we can further improve it to create growth and stimulate investment.

First a word on global economic interdependence. The recent economic crisis has demonstrated how extraordinarily intertwined the global economy has become. The downturn in the American housing market spread to the financial markets, not only "over there", but worldwide. After the collapse of Lehman Brothers, in September 2008, many economies fell into a recession.

When navigating the stormy waters of 2008, it became increasingly clear that we had to address the challenges of the economic and financial crisis in a coherent and coordinated manner. Thus, at the initiative of the Europeans, the G20 emerged at the height of the crisis as the “premier forum for economic and financial cooperation”, bringing all major economies around the table.

A determined and concerted policy action by political Leaders, promoting financial stability and supporting demand, allowed us to avoid a systemic meltdown as well as an outright Depression. It was an unprecedented achievement of global governance.

China has contributed hugely to the stabilisation of the world economy by leading the global economic recovery, boosted by a massive stimulus package. It thereby also contributed to putting an end to the deepest, longest and most broad-based recession in Europe since the Depression of the 1930’s.

With China and the EU being two of the main economic powers in the world, we do not only share common interests, but also common responsibilities towards each other and the global system.

In my view, the G20-framework for growth should remain a key instrument to foster economic policy cooperation at global level. As major economies, China and the EU need to do their part to achieve the agreed objectives for strong, balanced and sustainable growth. Credible medium-term fiscal policy strategies will contribute to a reduction in deficit and debt. Appropriate exchange rates and a sharp focus on pushing forward structural reforms are also needed.

To achieve those objectives it is necessary to analyse and, if needed, address, the causes of global macroeconomic imbalances. It is important to address sustained large current-account surpluses, just as it is important to address the deficits. Nobody has an interest in prolonging an unsustainable situation.

I therefore welcome the ambition of the Chinese leadership to rebalance China's growth model in the medium term by stimulating consumption. It will be key to secure a more resilient and inclusive growth for China. At the same time it would make an important contribution to the rebalancing of growth at the global level.

Exchange rates have to translate economic realities and fundamentals as was agreed at the G20 Summit in Seoul last year. Non appropriate exchange rates contribute to internal imbalances as external ones. Moreover, the impact of one's exchange rate on the global system is bigger to the extent one's economy grows. The correction of imbalances can be gradual and has to be mutual of course. We made progress the last six months in the right direction.

Let me say a few words, secondly, about the economic situation in Europe and in the Eurozone in particular.

Last year we faced an important challenge, a crisis of sovereign debt in the Eurozone. At some point, starting from a problem in Greece, the financial stability of the Eurozone as a whole was threatened. It forced us, as political leaders, to act with determination to make sure that we prevent such a crisis from happening again. That is what we did and what we continue to do.

We are also addressing the wider economic challenges. All EU countries are bringing down public deficits. The most vulnerable countries are undertaking determined action to come out of the crisis.

Two countries, Greece and Ireland, have received financial assistance with very strict policy packages of measures to be taken. An agreement with Portugal has been reached as well. And allow me to remind you that although these countries enjoy a disproportionately high attention of the press, together they represent only 6 percent of the Eurozone’s GDP.

Newspaper headlines might sometimes over-shadow that the economic recovery in Europe as a whole is on track and even gaining momentum in some Member States. Our economic fundamentals remain sound. We expect a growth of 1.8 percent in the EU (1.6 percent in the euro area) this year, and 2.0 percent in 2012.

Last week the IMF expressed its "quiet confidence" in the European recovery, both in the western and eastern regions. These growth figures may seem modest compared to the current Chinese growth rate, but taking into account that it takes place in mature economies with already a very high standard of living, and with a developed social protection, it is not bad at all!

Yet we do need higher structural growth, and we are working on it.

The positive outlook is supported by upbeat cross-sector EU business sentiment and better prospects for the global economy.

And despite some noise and setbacks, the fact remains that we have the largest internal market in the world, with 500 million mostly prosperous consumers; our macroeconomic fundamentals -- for example public deficit and debt -- are stronger than in most other advanced economies; the euro is a very strong currency, trusted by investors worldwide; we have a highly educated work force. And let us not forget the bigger picture: after a past of wars and conflicts, Europe has become a haven of stability and peace.

However, Europeans are acutely aware that in today's globalised world they have to become more competitive to keep the "European model", a system producing welfare with respect for the environment and social justice. In our over-all economic strategy ("EU2020") we call this "smart, sustainable and inclusive growth".

But growth is the key word. At the end of the day, we can only solve our budgetary problems and maintain or increase our standards of living and societal model if we create jobs and structural economic growth.

The countries of the European Union therefore also undertake major reforms to strengthen their long-term growth policies. We invest in our future. Much work is done by the countries themselves (pension reforms, labour market). One out of the many, many elements in our European strategy for growth, is to make the internal market more attractive for investors.

I come to my third and last issue, how can the EU and China better work together, to create growth and jobs for our citizens? How can we create an environment where you, as young entrepreneurs to be, can seize opportunities for the benefit of society?

Maybe most of you were too young to read the newspapers, but only two decades ago, China and the EU traded almost nothing at all. Here again, the speed of change is amazing.

Today, China is the EU's second biggest trade partner [after the US] - a position that is even likely to improve. China is also our fastest growing export market with a 37% increase of exports last year. Conversely, the EU is China's largest export market. Last year Chinese exports amounted to almost 300 bn. Euro. [282 bn.]

Thus, there can be no doubt that our economies are increasingly dependent upon each other. But this is surely not the end of the road, yet. It is in the interest of both sides to further expand trade and investment.

For that, the framework conditions between the EU and China need to be right. Reciprocity and mutual benefit should be the guiding principles behind opening our markets.

In that respect, although a lot of progress has been made, there still is quite some work to do in several areas. You may be aware there is a feeling in Europe that economic openness in China could further improve. More concretely, European businesses argue that there is a need for:

  • improved market access;
  • a better environment for investment;
  • the opening up of public procurement;
  • and finally, an issue going to the heart of the respect for the Rule of Law I talked about the beginning, a need for a more effective enforcement of intellectual property rights.

This message is addressed to the political authorities as well as to the business world.

Openness has to be mutual. That’s why a level playing field for trade and investment is key. The reason is political. In modern societies, people will only accept the downsides of international competition if their own country has a fair chance to win abroad what it looses at home. If not, populism and protectionism loom. Public acceptance is the precondition for a beneficial opening.

I am also aware that on the Chinese side investors look with great attention to the EU market: a highly integrated economic area with 500 million of consumers. Europe is welcoming environment for outside investors and businesses. For example in the area of public procurement, the EU market is open to Chinese investments.

I think also that some specific tools – for example the creation of an China Chamber of Commerce in Europe, similar to the EU Chamber operating in China – could help Chinese investors to fully exploit the opportunities present in the EU market. Another idea is a "clearing house" open to both sides' businesses which feel being treated unfairly due to a lack of level playing field.

In general, this is a untapped potential for more trade and investment and both sides of our Eurasian continent.

We can do more. We can do better. I firmly believe that we can all benefit from addressing our challenges together and exchange best practices.

Let me finally therefore give you three additional examples for specific areas where the EU and China could further stimulate sustainable growth:

First: innovation. We should both do the utmost to create an innovation friendly environment for our own businesses as well as for foreign investors. As President of the European Council I made innovation a central topic during the meeting of the 27 EU Heads of State or Government in February of this year. We decided upon various measures on innovation. An example is how to better use public procurement (which represents 17% of the EU GDP) to stimulate innovation.

Second: China experiences strong growth of its cities, in fact a new boom of urbanisation lies ahead. This will not only lead to a demand for technology, but also for urban planning, efficient solutions for transport and energy efficiency. Here, experiences in Europe -- architects, urban planners, or industry -- could make a useful contribution.

Third: we should promote an exchange of talents between Europe and China. We can only profit from a regular exchange of our best expertise. Universities can play a key role in this. The number of European students in China, and of Chinese students in Europe, should rise significantly. In Europe, one finds some of the most competitive universities in the world. Some of them are centuries old -- Bologna, Oxford, the Sorbonne, or my own old university of Leuven -- yet they have much to offer for those participating in shaping the future!

In politics and the economy, China and the European Union, are working together to create stability and prosperity for our citizens and the world at large.

As the entrepreneurs of the next generation, with the valuable diploma of this flourishing Business School, you will have an important responsibility to play to help to achieve these goals! The EU and China are investing in each of you! We expect a reasonable return!

I look forward to an open discussion now.

Thank you.

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