Q31 Jesse Norman: If you look at the German situation, I have spoken to senior German parliamentarians who say that they are quite happy and would prefer a situation in which you have 10 years of booming growth underpinned by a low exchange rate, followed by a catastrophe, than to have an unfettered or high exchange rate, comparative to the Deutschemark. How sustainable—
Dr Vines: You can see why. It is not unrelated to the Chinese growth model.
Q32 Jesse Norman: I understand that. Let me just get to the question and then ideally any of you can briefly answer. The German policy looks very simple, which is keep the pot boiling but not boiling over, allow fiscal catastrophe and monetary catastrophe in the periphery to restrain interest rates, and, since they are essentially irrelevant to German demand, that does not affect exports particularly. Since the euro crisis struck there has been an enormous shift of power from France to Germany. Why on earth should Germany have the tiniest interest--notwithstanding Martin Wolf’s suggestion that creditors and debtors are all in it together--why should they have the tiniest interest to play any other game apart from the possibility that the whole thing could go wildly pear-shaped and create a catastrophe? Why should they?
Dr Vines: I am watching people say that Mario Monti does not have more than a few months until Berlusconi tries to come back. I went to a terribly depressing meeting of Greek scholars a week ago in Oxford in which they were wonderfully articulate about how confused they were. Portugal is on the edge of—presiding over a southern Europe that is increasingly anti-German in spirit and vulnerable to extreme politics is not a recipe for running a good Europe.
Q33 Jesse Norman: Since we are running out of time, you essentially accept my analysis?
Dr Vines: Yes, and it is worrying.
Q34 Jesse Norman: Good. Therefore, you would suggest that the effect of the eurozone combined with these imbalances is essentially to create hostility and conflict rather than a context in which these policy solutions can be—
Dr Vines: That is my sense of Europe, yes.
Q35 Jesse Norman: Good. I am very keen to come on to you about Europe, but we are running out of time.
Dr Yueh: If I can quickly add something.
Jesse Norman: If you could quickly add something, I would be very grateful.
Dr Yueh: The German incentive should come from increasing its own real income. So one of the reasons why they sell so many exports is wage restraint. Productivity-adjusted wages only rose by 5% in Germany between 2000 and the decade after and it fell between 2000 and 2008. So, ultimately, they are the classic Oxford exam question, “Should a country grow by exporting as much as possible?” I think at some stage it is about incomes and, therefore—
Q36 Jesse Norman: If we have to rely on the German middle class’s appetite for higher real wages we will be waiting for a very long time. Can I ask you a question very quickly, Dr Yueh, on a completely different subject since we have little time, which is why should China create a welfare state? China looks at Europe and it thinks, “Decadent economies that have sapped the will to work.” Dr Brown, why should they go down this route? Why should they accept these nostrums from economies that they regard themselves as intellectually and economically superseding?
Dr Brown: They spend US$93 billion a year on social management because of the amount of contention in society—because of extreme inequality—and that is more than their defence budget, which is US$92 billion. That is a statistic from the National People’s Congress.
Q37 Jesse Norman: More than the defence budget we know about.
Dr Brown: It is still a huge amount of money. In terms of efficiency, they would want more social welfare. There are extremes between the generations maybe before 40 who have a sense of great social entitlement and think the state in China should give them everything and those who are younger and probably do not think the state should be nosing around in their life. So there are big issues. The objective of the Chinese Government over the last 10 years has been to create a middle-income country by 2020. That is a big kind of strategy and that means per capita GDP, I suppose, at today’s level of about US$8,000 or US$9,000.
There are three big things. The first is since 2008 the political debate in China has been about the comeback of state-owned enterprises. These have been the victors. Before they thought maybe state-owned enterprises were not so important, but now they have been vindicated because they have held steady and 50% of central Government tax revenues come from state-owned enterprises. I think 20% come from foreign enterprises. There is their importance. In China I think the first golden rule is you follow the money, so state-owned enterprises are big funders. The third thing is fiscal rebalancing. The point is that the central Government raises tax but the provinces spend it. This is a fundamental political issue. You have the central Government—
Jesse Norman: We have that problem in this country as well.
Dr Brown: For instance, if you look at one of the big budget lines it is pensions, and that is a huge issue. In Sichuan province, which is 100 million people, 90% of their budget goes on pensions. That is a big political decision. Finally, when we talk about Chinese money coming abroad, it is our political failure because, yes, we have done a little bit, but in Europe it is tiny amounts. Basically, it is mostly state money, it is mostly from Beijing and it is mostly directed according to political fiat. We have not made them a compelling case of why they should invest here and certainly on the eurobonds, as Klaus Regling, when he went to Beijing last October, hilariously said, he had not gone to the Chinese Government to ask them for money; he had gone to ask them what they would say if he had asked them for money. How ridiculous is that kind of approach to them, when they would think it was our problem and we should sort it out?