Global Economy Hit Harder

The global economy, it seems, is about to face yet another blow!

1. What has happened?

On July 26th, the European Council confirmed that seven member states—France, Italy, Hungary, Belgium, Malta, Poland, and Slovakia—have excessive fiscal deficits. In accordance with relevant regulations, the EU has initiated the Excessive Deficit Procedure against these seven countries, demanding that they take measures to reduce their deficit levels.

2. Is it very serious?

The EU's Stability and Growth Pact stipulates that the annual fiscal deficit of EU member states must not exceed 3% of their Gross Domestic Product (GDP), and public debt must not exceed 60% of their GDP. Data shows that in 2023, France's fiscal deficit as a percentage of GDP and public debt as a percentage of GDP were 5.5% (111%), Italy's were 7.4% (137%), Hungary's were 6.7% (73.5%), Belgium's were 4.4% (105%), Malta's were 4.9% (50.4%), Poland's were 5.1% (49.3%), and Slovakia's were 4.9% (56%), with Romania's at 6.6% (48.8%). Notice that the deficits of larger countries are more severe. Among them, most of these seven countries have had a deficit rate exceeding the standard for three consecutive years. For example, France's deficit rates in 2021 and 2022 were 6.5% and 4.8%, respectively.

3. Why are there restrictions?

While the EU is ostensibly one family, in reality, it operates as separate households. Some countries, like Germany and France, are financially prosperous, while others are not, similar to how in China, some provinces are poor and others are wealthy. If poorer countries aggressively accumulate debt, leading to deficits, they will inevitably be unable to repay them, just like Greece's debt default.At this point, if there is no assistance, it may directly lead to the disintegration of the European Union. After all, the purpose is to band together for warmth, but if problems arise and are left aside, who would still be willing to participate? At the same time, it would also affect the trust in the entire euro.

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However, if assistance is provided, it would encourage everyone to take on debt. After all, the benefits are for oneself, and the drawbacks are borne by the EU as a whole. Countries with good economies would feel that they are at a disadvantage. The UK's exit from the EU, to a large extent, is due to this.

Therefore, there is such a regulation, the Stability and Growth Pact. However, it has been a problem that it cannot be perfectly implemented. Just like Greece, there have always been restrictions, but the lack of coercive measures makes it useless.

Especially when the referee also acts as a player, it's even more difficult to play. In November 2003, the EU finance ministers rejected the proposal of the European Commission and decided to temporarily suspend sanctions against Germany and France, causing the credibility of the pact to be greatly damaged.

4. Why is this the case?

The EU has a unified currency, but not a unified fiscal policy. This leads to a situation where, when facing economic downturns, countries cannot increase competitiveness by devaluing their currencies, and can only resort to fiscal stimulus policies, ultimately leading to excessive government deficits and towering debts.

You must be thinking, can't they just reduce wages? No, reducing wages can easily lead to social issues, and in addition, reducing wages can lead to the movement of people to other EU member states.

In fact, even China has such internal issues, such as Guizhou and Yunnan being poor (but also continuously supplying labor), high fiscal deficits, but with the central government to balance and make certain transfer payments. However, there is a lot of resistance to making transfers within the EU, which is the endogenous contradiction of the EU.

5. What is the Excessive Deficit Procedure?

According to the relevant regulations, the EU has initiated the Excessive Deficit Procedure against the above seven countries, requiring these countries to take measures to reduce their deficit levels.In simple terms, it means adopting fiscal austerity policies to reduce spending and consumption. So, isn't this just adding insult to injury for the already not-so-good global economy and the European economy?

However, this restrictive measure is somewhat nominal and is estimated not to produce particularly significant austerity in the short term, but it does not mean there is no impact.

6. What impact does it have on China?

Regarding the European Union, my view has always been pessimistic. Over the past 20 years, Europe and Japan have been in the same situation, with their ceilings locked by the United States, and China is catching up from below. It is not an exaggeration to say that China is destroying Japan and Europe.

Let's take a close look at how much the industries in Europe and China overlap now.

Europe's most powerful automotive industry is now being forced to impose tariffs, and Volkswagen dares not import electric vehicles from its own country. China's electric vehicle manufacturing costs are about 20% lower, and the level of intelligence is even higher.

In the aircraft industry, France has Airbus, and China has the C919. The cost of an aircraft is only 550 million, and the selling price is between 650 million and 700 million, which is 20% cheaper than the same type of Airbus.

There is no need to talk about the communication industry, as Huawei has already beaten Ericsson to the ground. New energy is even more needless to say, no one in the world can compete with China.

France's pride, the nuclear power industry, has also been caught up by China. China's third-generation nuclear power technology is already very mature.

In the machinery industry, Europe has Siemens, and China has Sany Heavy Industry, Zhenhua, LiuGong, China First Heavy Industries, and so on.Electronic manufacturing is even more off the table; Europe and Japan have virtually vanished in the mobile internet era. They're not even at the gaming table anymore, so what's the point of playing?

So, Europe is no longer the Europe of the past; it can't afford to be complacent. The good old days of working four days a week and resting three are long gone. Have you noticed that 10 years ago, the euro was worth 10 Chinese yuan, but now it's less than 8.

For China, on one hand, this means that its export strategy has been extremely successful. On the other hand, it implies that the entire European Union will enter a continuous deficit, eventually regaining competitive advantage through currency devaluation, just like Japan has done in the past year. If they can't compete with us, they have to lower their prices.

The Chinese industry's entry into Europe won't be smooth sailing. In the coming period, it might not just be the automotive industry that faces European trade barriers; other industries may also encounter obstacles, making the journey anything but easy.

However, looking at the long term, in the international arena, it's still about what you bring to the table. In terms of technology, Europe's accumulated advantages are gradually diminishing, while China's technological edge is steadily catching up!