Sanjaya Baru: Merkel in China

NEW DELHI – German Chancellor Angela Merkel’s second visit to China in a year comes against the backdrop of dire forecasts of a difficult September for the eurozone. Mindful of such concerns and persistent pessimism in global financial markets, Merkel is now taking bold political initiatives at home and overseas. Indeed, her China trip should be seen as an effort to assert leadership across the eurozone.

At home, Merkel recently sent out a clear message to her critics that Germany must pay a price for eurozone leadership. She cautioned her colleagues against loose talk about a “Grexit” – Greece’s exit from the eurozone – and assured visiting Greek Prime Minister Antonis Samaras that Germany remained committed to his country’s membership of the eurozone.

While it required courage to take such a tough stance, doing so helped to bolster her position at home and throughout the eurozone. There is now no doubt that Merkel is willing to commit Germany to the cause of preserving both the European Union and the eurozone, and that she will work to achieve that goal. If she succeeds, she will emerge as the first great European leader of the twenty-first century.

This stance suggests that Merkel appreciates the essence of the argument that François Heisbourg, the chairman of the council of the International Institute for Strategic Studies (IISS), advanced in a recent essay: a federal arrangement does not fall apart because of problems at the periphery but because of “failure at the heart of the system.” Merkel has come to terms with Germany’s position – and that it must act to preserve the unity of the whole.

The eurozone (and probably the EU) cannot be saved in Greece or Finland if it cannot be saved in Germany. Committing Germany to that objective is precisely what Merkel has defined as her political goal for the rest of her term in office.

Within hours of declaring her leadership at home, Merkel announced her visit to Beijing. The timing was highly significant: Merkel goes to China, the emerging global power, after declaring her own commitment to strengthening the eurozone, if not the EU as a whole, as a credible pole of an emerging multipolar world.

In recognition of Germany’s growing significance, Chinese Prime Minister Wen Jiabao welcomed a delegation of German business leaders to Beijing this May with the words: “Stronger Chinese-German cooperation is good for the two countries, good for China-EU relations, and good for world prosperity and stability. The strategic dimension of Chinese-German relations, therefore, can only be strengthened, not weakened.”

There are several dimensions to the bilateral relationship. Germany needs both China’s markets and the funds that its government can deploy to purchase German and European bonds. It also has more than 7,500 enterprises operating in China, with gross investment totaling $18.5 billion. Moreover, Germany has sold $15 billion worth of technology to China, and bilateral trade hit a high of $169 billion in 2011, accounting for 30% of total China-EU trade. The two countries have set a bilateral trade target of $280 billion for 2015.

Trade, however, is not the only immediate concern. Far more important, especially for Germany, is to get China to invest in and hold its bonds. In mid-August, at the First IISS Oberoi Lecture in Mumbai, Klaus Regling, the CEO of the European Financial Stability Facility, underscored the importance of Chinese demand for EFSF bonds and China’s role in stabilizing the eurozone.
Regling also revealed that there is now increased and frequent coordination between monetary authorities in the United States, Germany, and China, drawing attention to the fact that the “old Triad” of the dollar, euro, and yen may now have been replaced by a “new Triad” of the dollar, euro, and Chinese renminbi. While Regling spoke of an emerging “multipolar monetary system,” his remarks clearly indicated the functioning of a “tripolar” system.

Lying at two ends of that monetary triangle, the eurozone and China have acquired a geopolitical stake in helping each other. Hans Kundnani and Jonas Parello-Plesner of the European Council on Foreign Relations view the China-Germany relationship as one that will shape the overall China-EU relationship. Like many strategic analysts, they worry whether Germany, in pursuit of purely short-term economic interests, might forsake long-term strategic interests and concerns about human rights, environmental problems, press freedoms, and other political and geopolitical issues.

It is significant, therefore, that German political parties have emphasized the need for Merkel to raise such matters in her talks with Chinese leaders. However, Merkel’s focus may well remain on trade, investment, and currency flows. After all, unless she can turn around the eurozone, her rising profile at home and in Europe could easily wither.

What this means is that to secure German leadership of Europe, and her own leadership of Germany, Merkel has to “walk on two legs,” so to speak. She needs to balance both geo-economic and geopolitical factors – both interests and values – in advancing Germany’s relations with China.

Sanjaya Baru is Director for Geo-economics and Strategy, International Institute of Strategic Studies (IISS), and the author of The Strategic Consequences of India’s Economic Performance.

Sanjaya Baru: Asia’s Energy, Asia’s Security

NEW DELHI – As Asia’s rising powers seek to sustain growth and ensure stability, energy security has moved to the forefront of Asian geopolitics. The recent visit by China’s Prime Minister Wen Jiabao to Saudi Arabia, the United Arab Emirates, and Qatar was as much about ensuring energy security for China as it was about China playing a role in maintaining political stability in the Middle East.

The visit came against the backdrop of the growing threat of United States-led oil-export sanctions against Iran and China’s need to secure alternative sources of oil and gas. But its unstated purpose was to bolster China’s rising profile in the Persian Gulf and the Muslim world.

Having faced a pushback in East and Southeast Asia after the US enunciated a new strategic framework for the “Indo-Pacific” region, and given the growing profile of energy in the geopolitics of the South China Sea, the Chinese are moving to secure their western flank. Indeed, in the six years since Saudi King Abdullah’s visit to China in January 2006, China has emerged as the most important Asian power in the Gulf, establishing extensive business and strategic links.

At a conference on “Gulf and Asia,” organized by the Geo-Economics and Strategy Program of the International Institute of Strategic Studies in Bahrain last October, Yang Guang of the Chinese Academy of Social Sciences pointed out that China had overtaken the US as the biggest importer of oil from the Gulf Cooperation Council (GCC) countries.

While China is investing in pipelines in Central Asia and Russia, and in oil equities in Africa and elsewhere, according to Yang, for China, “the Gulf region’s abundance of resources, its geographic position, and good transport links make it the primary option on the list of international oil suppliers.” Even as the US and Europe reduce their dependence on Gulf oil, China will remain strategically dependent on the Gulf for their energy.

So will India. Indeed, Indian National Security Adviser Shiv Shankar Menon also toured the Gulf recently, visiting Saudi Arabia, Qatar, and Kuwait. Though his foray into the region attracted much less attention than Wen’s, the focus of his visits was, likewise, energy security (as well as securing Arab investment in India).

Both China and India buy oil from Iran (with China accounting for 22% of Iran’s oil exports), and thus would be adversely impacted by US-led sanctions. But both countries have interests in the region that go far beyond oil.

For China, the GCC countries have emerged as a major market for Chinese manufactured goods and food exports. For India, the region is home to six million expatriates who remit annually close to $20-30 billion – almost half of the $60 billion in total yearly remittances by Indian workers abroad.

Concerns about the fallout of Gulf instability for India’s energy security have risen alongside deepening ties with Israel. Indeed, when Indian Foreign Minister S. M. Krishna visited Tel Aviv this month to explore possibilities for diplomacy in alleviating regional tensions, he was received with the honors accorded only to Israel’s closest allies.

Such diplomatic activism by China and India clearly reflects their shared concern about energy supplies. Both countries have so far gone along with United Nations-authorized sanctions against Iran, and have publicly demanded that Iran adhere to its commitments as a signatory to the Nuclear Non-Proliferation Treaty (NPT). But the bottom line for both countries is energy security.

Both China and India will seek to impress upon the US that any action against Iran aimed at preventing it from developing nuclear weapons should not be at the expense of economic growth and energy security in Asia. Given the stake that both the US and Europe have in stabilizing and sustaining global growth, their policies should be aimed at ensuring that China, India, and other newly industrializing Asian economies can take up the slack created by the slowdown in OECD economies.

So, even as Wen travels west, the West must travel east. A trilateral initiative by the US, China, and India in the Gulf, aimed at facilitating a resolution of historic problems in the region, would benefit global growth and stability. As the region’s biggest and most influential country, Saudi Arabia could play a positive role by inviting the US and Asia’s two giants to work jointly towards a peaceful resolution of the Iran problem.

While Russia has its interests in the region, it has little or no stake in arresting the rise in oil prices that instability in the Gulf would trigger. China and India, on the other hand, would be badly affected by another surge in oil prices.

India can ill afford a further economic slowdown, with GDP growth this year forecast to fall to 7.5%, compared to the five-year average of 9% in 2003-08, while inflation remains high, partly owing to rising energy prices. Deepening malaise there and in China would disrupt global growth at a time when Europe remains mired in crisis.

The US, too, cannot afford military conflict in the Gulf, given its need to shore up the domestic foundations of its economic power. As a result, the time is ripe for fresh ideas and innovative initiatives aimed at addressing Asia’s energy-security concerns in the Middle East. Increasingly, those ideas and initiatives will come from Asia itself.

Sanjaya Baru is Director for Geo-Economics and Strategy at the International Institute of Strategic Studies.