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China and Merkel do diplomatic Euro debt dance

BEIJING – As Europe grapples with its debt crisis, German Chancellor Angela Merkel is in China for her fifth visit in six years, signifying China's ever growing importance and a new opportunity for Chinese diplomacy.

As the leader of the strongest economy in the European Union, the chancellor has called for more "Europe," a stronger union as an answer to the Eurozone crisis. And China with its massive $3.2 trillion in foreign currency reserves is seen as a potential source of critical support for any European bailout program.
China's challenge is how to contribute to Europe's rescue while resisting any attempt to extract political favors or counter-balance the United States, some observers say.  There are also concerns about whether Merkel, in her dealings with the Chinese, can pursue European diplomacy as distinct from a purely German diplomacy. 

Pushing for China's constructive role 
In her speech to a top government think-tank, the German chancellor set the tone of her three-day visit by calling on China to use its influence to persuade Iran to give up its nuclear ambition, clearly pushing China to support the recent initiatives for sanctions and to play a more constructive role. 

"I will advocate, that if Europe, for example, imposes sanctions (on Iran), that China still uses the influence it has to tell Iran that we do not need, and cannot allow, another power with nuclear weapons," she told the assembly at the Chinese Academy of Social Sciences.

Addressing Chinese concern about Europe's debt crisis, she explained her recent call for greater budget discipline. "I say if we are not ready to step by step impose this budget control, and the fiscal pact is an important step here, Europe will not succeed in the long term," she said, stressing the need for greater European "cohesion.”

The German leader has raised a wide range of issues with the Chinese side, including human rights, intellectual property protection, and improved market access. 

Greater Chinese contribution? 
After meeting with Merkel, China's Premier Wen Jiabao declared China's willingness to consider greater contribution to a European bailout plan.

"China is also considering increasing its participation in the solution of the European debt crisis through the channels of the EFSF and ESM," Wen said, referring to the European Financial Stability Facility and the European Stability Mechanism. 

The ESM is a 500-billion-euro ($650 billion) permanent bailout fund that is due to become operational in July. The EFSF is a temporary fund to help Ireland, Portugal and Greece.

While Wen did not make specific commitments, the positive language significantly raised the prospect of China eventually contributing to a bailout plan.

According to most estimates, China has about a quarter of its foreign exchange reserves in euro assets. Beijing has expressed its support for a stable euro, but has been reluctant to make specific promises about rescue contributions due partly to domestic public opinion. 

Learning from Germany? 
"As a Chinese saying goes, one does not visit the temple for nothing," commented Ouyang Shi in a China Daily opinion piece "Friendship is a two-day street." 

Referring to the Merkel visit, the commentary cited China's two long-standing demands: recognizing China's market economy status which will improve China's trading position and lifting the arms embargo that was imposed in the aftermath of the 1989 Tiananmen crackdown, which he wrote "smacks of Cold War mentality.”

"Some in China suggest that we link these problems with continued Chinese support to Europe. But this is not the mainstream opinion, and few expect these problems to be solved quickly," the commentary added.

These demands echo earlier government positions, but China seems to have since realized that attaching precondition to Europe assistance could backfire and encounter resistance from the United States and its allies.

Instead of demanding strategic benefits, Beijing's leaders can view the European crisis as an excellent opening for China to play a constructive role, while neutralizing any international fear about China's rising clout, according to David Gosset, a top expert on Chinese-European relations based in Shanghai.

"The role of China as a catalyst for European integration should not be seen as a way to contain the U.S., but as a long-term strategic action to create the conditions for equilibrium in a multipolar and globalized world system," he declared in an Asia Times commentary. 

And there are examples known to the Chinese themselves on how the fear of China can be blunted, noted Jonathan Holslag, a research fellow at the Brussels Institute of Contemporary International Relations.

"Indeed, one senior official told me that China should position itself like Germany has in Europe, letting its clout be neutralized by an Asian regional organization," he wrote on the diplomat.com web site. 

German or European diplomacy? 
While China is important, Merkel's diplomacy towards China and Asia is "more German than European," according to a statement by the European Council on Foreign Relations. 

In an interview with NBC News, Dr. Francois Godement, the Council's Senior Fellow and Director for Strategy of Asian Center, criticized the weaknesses of European diplomacy.

While noting that Merkel's government has all around Asia policy, it "somehow misses explicit support for EU wide negotiations – even if she does not contradict the EU. So this looks like a German policy," he said.

"Sarkozy and France currently have the least leverage on policy towards China. That makes France a more direct supporter of EU level negotiations," Godement added.

"The real loser in this situation is the EU," he said, adding that "the Chinese feel they have more leverage, and get better deals, with the member states.”

"This situation already existed on human rights issues, there is a danger it's also there on trade and investment issues," he warned.