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Paul Horne Nov 0905

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Independent International Market Economist To J. Paul Horne Philadelphia, 9 November 2005 Comments By •Most Chinese-EU issues involve key U.S. interests and reactions •Arms, trade, out-sourcing, energy supplies, capital flows, interest rates, FX – have vital implications for all 3 •EU defense, fiscal, labor, social policies increasing influenced by China •EU’s own problems make dealing with CH difficult, and often earns US enmity 2 Europe … the “Old World” 3
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Europe’s View Of China -- A Triangular One Comments By J. Paul Horne Independent International Market Economist To Global Interdependence Center Philadelphia, 9 November 2005
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Page 1: Paul Horne Nov 0905

Europe’s View Of China -- A Triangular One

Comments By

J. Paul HorneIndependent International Market Economist

To

Global Interdependence CenterPhiladelphia, 9 November 2005

Page 2: Paul Horne Nov 0905

2

China is for Europe aTriangular not Bilateral Problem

• Most Chinese-EU issues involve key U.S. interests and reactions

• Arms, trade, out-sourcing, energy supplies, capital flows, interest rates, FX – have vital implications for all 3

• EU defense, fiscal, labor, social policies increasing influenced by China

• EU’s own problems make dealing with CH difficult, and often earns US enmity

Page 3: Paul Horne Nov 0905

3

Europe … the “Old World”

Page 4: Paul Horne Nov 0905

4

Issues Facing EU and € • Demographics – aging = resistant to change• Institutional – how to govern 25 countries ?• Fiscal – EU and national budget limits• Monetary - € + ECB success = constraints• Structural – fear of J curve pain before joy• Int’l. – Doha, NATO, Mid-East, China, U.S.• Cultural – European model(s) vs. U.S.• Political – keeping power while coping

Page 5: Paul Horne Nov 0905

5

EU vs. Global Economy• EU-25 economy out of “synch” :

–Limited business opportunities, labor constraints, low Rate Of Return on capital =

–FDI outflow to U.S., China developing world = EUR appreciation = slows export growth–EU is No. 1 U.S. trade - investment partner–China-India labor force direct threat to EU = EU policy makers get more protectionist–EU-15 Geezer Land but immigrants unwelcome

Page 6: Paul Horne Nov 0905

6

Real GDP to ‘06 By Region (%)• EU 2% growth

trend lags US, CH, Emrg. Mkts.

• China leads Asia and Emrg. Mkts.

• Source: IMF World Economic Outlook, Sep05

Page 7: Paul Horne Nov 0905

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Top Importers of Merchandise, Commercial Svcs In 2004

Source: WTO Statistics, Nov05

0.0

5.0

10.0

15.0

20.0

25.0

30.0

U.S. EU China Japan Canada S. Korea

% o

f Wor

ld T

otal

Merchandise Services

Page 8: Paul Horne Nov 0905

8

EU-25’s Principal Trading Partners(USD bn in 2004)

• Source: Eurostat, Oct05

0

100

200

300

400

500

600

U.S. China (ex-HK)

Russia Japan Switzerland

Expts.

Impts.

Page 9: Paul Horne Nov 0905

9

Europe’s Competitors For Oil

• Source: The Economist, 27aug05

Page 10: Paul Horne Nov 0905

10

Intl. Oil Demand Growth Eases(Citigroup, GEOS, 26 Oct05)

Page 11: Paul Horne Nov 0905

11

U.S. – China Oil Output Forecast Trend – 2002 - 2025

Source: U.S. Energy Information Administration, Oct05

0

2

4

6

8

10

12

Mm

. bbl

. per

day

U.S. China

Page 12: Paul Horne Nov 0905

12

U.S. – China Oil Consumption Trends Forecast - 2002- 2025

Source: U.S. Energy Information Administration, Oct05

0

5

10

15

20

25

30

Mm

. bbl

. per

day

U.S. China

Page 13: Paul Horne Nov 0905

13

Saving, Investment, C/As (%GDP)

• Source: IMF World Economic Outlook, Sep05

Page 14: Paul Horne Nov 0905

14

Saving, Investment, C/As In China, East Asia (%GDP)

• Source: IMF World Economic Outlook, Sep05

Page 15: Paul Horne Nov 0905

15

China Saving By Sector (%GDP)

• Gross domestic saving near 50%

• Business unable to invest enough

• Consumer spends and saves less

• Even govt. saves

• Source: IMF World Economic Outlook, Sep05

Page 16: Paul Horne Nov 0905

16

Interest Rate DifferentialsFed funds vs. ECB -- 10-yr Treas. vs Bund Ylds

• Fed tightens since June 2004

• ECB at 2.0% since June 2002

• US-EUR yields diverge since May 2004

• China policy to track U.S. ?

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Perc

ent

Fed fundsECB

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

U.S. 10-yr.German 10-yr.

Page 17: Paul Horne Nov 0905

17

Dollar – Euro Waltz – 1999 – 2005USD:EUR (red) – EUR:USD (blue)

• Source: Federal Reserve daily data to 21oct05.

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Page 18: Paul Horne Nov 0905

18

As long as they focus on each other…

• Source: Financial Times, 28sep05

Page 19: Paul Horne Nov 0905

19

EUR TW Indices & Bilateral FX 1999 - 2005

Source: ECB, Monthly Bulletin, Oct05

Page 20: Paul Horne Nov 0905

20

Euro Area FDI, Portfolio Flows

• Source: ECB Monthly Bulletin, Oct 05

Page 21: Paul Horne Nov 0905

21

EU’s Declining Growth Potential

Source: Crédit Agricole, Nov 05. EU potential per Oct 05 Consensus Forecasts. ECB production function estimate, for its monetary policy, is 1.75% vs. 2.0-2.5% in 1980-2000.

Page 22: Paul Horne Nov 0905

22

Current EU – CH Issues:• Trade (textiles, arms), capital flows and FX• Energy & metal supplies – CH competes• World labor force with China + India =

structural changes forced on Europe• China lowers EU prices = disinflationary,

slowing economic and job growth• FDI: CH may rival US as future pot of gold• Security issues: arm sales vs. cordon

Page 23: Paul Horne Nov 0905

23

EU’s Medium-Term Challenges• Economic growth of

1.5% to 2.% to 2007• UR stabilizes at 9%• EUR deficit = 3.2%• EUR slips vs USD• Biz confidence up if

Merkel produces• EU budget squabbles• Trade protectionism

sentiment rises

• No new constitution until French vote 07

• Accession talk delay• EU process slows• Politics move right• Anti-immigrant trend

worsens• Disputes with U.S.

grow in number, tone

Page 24: Paul Horne Nov 0905

24

Do Euro-Leaders have a clue ?

• Source: Internet, late 2004

Page 25: Paul Horne Nov 0905

25

Special EU – US - CH Issues• H5N1 – do CH farmers get paid to cull ?• Counterfeiting, patents, copyrights• Corporate, tax and property law• Human rights … for 1.4 billion• Environmental issues … for everybody• Demography – EU grays, US ages, CH ? • China’s competitors tomorrow : India,

Burma and … TN ?


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