State of the Union: EU-China trade talks and interest rates to stay put

It is a make-or-break moment for Europe’s relationship with China – if you believe the EU’s Trade Commissioner.

Valdis Dombrovskis ventured into the lion’s den this week telling his Chinese counterparts that the bloc has had it with their lawless capitalism.

Both sides could now choose a path towards mutually beneficial relations or a path that slowly moves them apart, he said.

Pointing to a staggering EU trade deficit of almost €400 billion with China, Dombrovskis did not mince his words.

“We also have real concerns about market access and other challenges,” the trade commission said this week while in Beijing.

“The business environment has become more political and less predictable. We have requested that our Chinese partners engage with us on these challenges. Specifically, we wish to see greater transparency, predictability and reciprocity.”

Economic relations between China and the EU were thrown into the spotlight earlier this month after the European Commission launched an investigation into Chinese subsidies for its electric car industry.

By distorting the market of one of Europe’s industrial crown jewels, China has crossed a line – this is what Brussels was making Beijing understand.

A serious downturn in the European car business could trigger a domino effect that Europe cannot afford.

This is all in the face of a European economy that remains sluggish and an inflation rate that remains stubbornly high.

Interest rates unlikely to budge soon

And it is the latter that the European Central Bank (ECB) is most worried about.

At a hearing in Brussels this week, ECB president Christine Lagarde made clear that interest rates will remain high until the fight against inflation is won.

“We remain determined to ensure that inflation returns to our 2% medium-term target in a timely manner. Inflation continues to decline, but is still expected to remain too high for too long,” the French bank chief said.

“In any case, our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.”

But as long as interest rates in the euro area remain at historically high levels, it will be difficult for the economy to grow, something that is already starting to affect the rest of Europe, as latest forecasts suggest.

Beata Javorcik, chief economist of the European Bank for Reconstruction and Development, said in an interview that it’s not all doom and gloom for the continent’s economy.

“Inflation has eroded household budgets and led to slower growth of consumption, and uncertainty is detrimental to investment,” Javorcik told Euronews.

“But there is one bright spot, and that is tourism. Some economies in Western Balkans and southern Europe are enjoying a record high number of arrivals.”