What China Would Gain from Europe in Bailing Out Euro Zone

A Chinese paramilitary officer stands in front of the European Union flag outside the office of the E.U. delegation to China in Beijing on Oct. 28, 2011

In years to come, economists and historians might hark back to this week as the moment the balance of world power tipped toward China. The signs have been there for while, but the symbolism is especially potent now, in the few days between yet another euro-zone crisis summit, held in Brussels on Oct. 26, and the Nov. 3-4 G-20 summit in Cannes, France. The reason for choosing this as the watershed is crudely financial: at the Brussels summit, European leaders made a previously unthinkable appeal for China to use its $3.2 trillion currency reserves to help dig the euro out of its debt hole. And while the euro zone is anxiously awaiting an answer, China — inscrutable about its intentions — is milking the moment.

China is being targeted as a potential investor as part of a complicated scheme agreed to at the summit to leverage Europe's bailout fund up to €1 trillion ($1.4 trillion), along with other potential outsiders like Russia, Brazil, Middle Eastern countries and the International Monetary Fund. On Oct. 27, French President Nicolas Sarkozy, who is hosting the Cannes G-20 gathering, phoned Chinese President Hu Jintao to seek backing. "If the Chinese, who have 60% of global reserves, decide to invest in the euro instead of the dollar, why refuse?" Sarkozy said after his call. "Why would we not accept that the Chinese have confidence in the euro zone and deposit a part of their surpluses in our funds or in our banks?" (See "Europe's Debt Crisis Agreement: The Good, the Bad, the Ugly.")

China can certainly spare the €100 billion ($140 billion) reportedly being discussed among officials. The real question is why China would want to plant it in a low-growth region like the euro zone. The bond-leverage scheme has already generated its share of criticism, and Greece's recently announced euro referendum only adds to the uncertainty and risk. The Chinese government's official news agency, Xinhua, cautioned in an editorial that "emerging economies should not be seen as Europe's Good Samaritans."

Yet there are still strong reasons that China might park some of its funds in the bailout scheme or some other bond offering. One is that it is already heavily involved: a quarter of China's currency reserves are thought to be held in euros, and Beijing has been a regular buyer of euro-zone bailout bonds in the past. Over the past year, the Chinese government has made several pledges to purchase European debt issues, both at the bilateral level with indebted countries — including Portugal, Greece and Hungary — and toward the euro zone as a whole. (See why the euro hasn't been fixed yet.)

China also has a vested interest in shoring up its biggest trading partner, with which it had bilateral dealings worth €363 billion ($503 billion) last year, almost 10% of the total global-trade flow. China's growth prospects depend heavily on Europe's consumers, whose average per capita GDP is about $32,500, compared with about $4,500 in China. A weaker euro would make Chinese exports more expensive for Europeans. And maintaining the euro as a reserve currency aids China's efforts to counterbalance the U.S. dollar and create a multipolar global economic system.

But significantly, this hands China a remarkable opportunity to extract concessions, both economic and political. In September, Chinese Premier Wen Jiabao implied an effective quid pro quo when he asked Europeans to "put their houses in order," almost as a condition for China's "extending a helping hand." (See pictures of the global financial crisis.)

In trading terms, this might be reflected in the recognition of China's status as a "market economy" when it comes to European Union trade sanctions, a measure that could boost exports otherwise hindered by tariffs. And since the E.U. currently has some 55 anti-dumping measures in place against China, individual member states might also be pushed to ease their stance on future sanctions. Other trade issues might slip from the agendas, to the chagrin of European exporters, who regularly gripe about Chinese rules on foreign ownership, subsidies reserved for Chinese firms, lack of access to the public-procurement market and selective enforcement of intellectual-property rules.

These concerns were already raised in July by the European Council on Foreign Relations, which published a paper titled "The Scramble for Europe" on China's "game-changing" economic presence in Europe. It warned that if China became too involved in major financial, investment and public issues, it would leave the Europeans little leverage to improve their access to the same sectors in China, which are mostly closed or controlled.

The political implications are potentially even more troubling for Europe, which has long considered it a right, even a responsibility, to criticize China on issues like human rights and environmental protection. It could mean, for example, that the E.U. lifts its ban on arms sales to China, imposed in the wake of the 1989 Tiananmen Square massacre, or that the Dalai Lama receives fewer invitations to meet European leaders. Fredrik Erixson, director of the European Centre for International Political Economy, a Brussels-based think tank, says that even if there are no formal trade-offs, Beijing could expect generous favors from Europe after years of what it considers intrusive interference. "China wants something more: international recognition in one way or the other, or a Europe that in Beijing's view stops poking its nose in internal Chinese politics," Erixson says. (See pictures of China's investments in Africa.)

At Cannes, Chinese leader Hu will doubtless refrain from any early commitment on the euro-bailout scheme, while soaking up the flattery from Europe's pleading leaders. But he will be aware that as China consolidates its emergence as a world player, any investment risks in the program would be a small price to pay for the wave of European goodwill it would generate.

Is it time to admit the euro has failed?

See 25 people to blame for the financial crisis.

Inside the Numbers: Why Romney Would Outperform Perry Against Obama

Inside the Numbers: Why Romney Outperforms Perry Against Obama | Swampland | TIME.com /* */ Home TIME Magazine Photos Videos Specials Topics Subscribe Mobile AppsNewslettersRSS @TIME NewsFeed U.S. Politics World Business Money Tech Health Science Entertainment Opinion SEARCH TIME.COM Full Archive Covers Videos 2012 ElectionDebatesDemocratic PartyPollsRepublican PartyMichele BachmannMitt RomneyRick PerryWhite HouseBarack ObamaJoe BidenCongressBudgetsHouseSenateLobbyingJohn BoehnerMitch McConnellNancy PelosiHarry ReidDomestic PolicyAbortionAgricultureDebtEconomyEducationHealth CareHousingForeign PolicyAfghanistanChinaDiplomacyHillary ClintonIranIraqPhotosSpecialsVideos PollsInside the Numbers: Why Romney Outperforms Perry Against ObamaBy Alex Altman | @aaltman82 | October 14, 2011 | View CommentsTweetTristan Spinski / CorbisRepublican presidential candidates Rick Perry, left, and Mitt Romney, applaud during the Fox News/Google GOP Debate in Orlando, Fla., Sept. 22, 2011.

After weeks of shaky debates and swirling questions about his record in Texas, it’s no surprise that Rick Perry is running behind Mitt Romney in head-to-head general election matchups against Barack Obama. Perry lags 12 points behind Obama, 50% to 38%, in TIME’s new poll, while Romney trails the President by a 46% to 43% margin, within the margin of error in most polls. Thirteen months before the election, the utility of horserace figures is limited. Still, the poll captures a useful snapshot how Perry’s support has softened even among the conservative blocs that seemed poised to rally behind his candidacy.

There are two areas in particular that should give immediate pause to Republicans looking ahead to a general-election tussle. For one, Romney is far better position to vie for the independent voters who help swing tight battles. He leads Obama among self-identified independent likely voters, 45% to 42%. Obama, by contrast, has a 47% to 39% edge over Perry in the fight for the same group.

The second area where the former Massachusetts governor boasts an edge is in the Midwest, home to an industrial corridor where the shrinking manufacturing base and sluggish recovery has dragged down Obama’s support. The ability to retake states like Ohio and Indiana would be a critical boost to the Republican nominee’s prospects, and Romney, who hails from Michigan — the state his father ran for a stretch — is in better position right now to accomplish that feat. Romney leads Obama in the Midwest by seven points, 46% to 39%. Perry trails the President in the region by the same margin.

But Perry’s most alarming area of under-performance is among evangelicals, a conservative faction squarely in Perry’s wheelhouse. This is a governor whose revival rally filled a Houston football stadium, who courts conservative bigwigs in language that reveals a Biblical fluency. Less than a week ago, a Perry supporter sparked a kerfuffle by suggesting that Romney, a Mormon, would not appeal to Evangelicals on the hunt for a true Christian candidate rather than an adherent to a “cult.” And yet in TIME’s poll, Romney outperforms Perry among Evangelicals, leading Obama 51% to 39%. Perry leads Obama among Evangelicals as well, but by a slimmer 46% to 40% margin. That head-to-head deficit in a prime Perry demographic may underscore the degree to which his faltering performance has sowed doubts among potential supporters.

The poll, conducted for TIME by Abt SRBI, surveyed 1,001 voters on Oct. 9-10.

Related Topics: 2012, evangelicals, gop, independents, midwest, mitt romney, rick perry, Polls
emailprintshareLinkedInStumbleUponRedditDiggMixxDel.i.ciousWriteView Comments@TIMEPoliticsLatest on SwamplandMust Reads | October 14, 2011Morning Must Reads: BurdenBoehner orders up infrastructure, aviation and trade bills. Het gets prickly with Obama on jobs.The White House weighs a plan to woo private firms into a bigger role in housing finance.Romney continues Sino saber-rattling on trade.From our PartnersJimmy Carter: 'I'm Optimistic' Obama Will Win 2012Huffington PostFive Questions for President ObamaPoliticoMichele Bachmann: Rick Perry Rewarded Donors With State MoneyHuffington PostArticles of Faith | October 14, 2011Will Evangelicals Doom Romney?

Mitt Romney can’t seem to broaden his appeal beyond a quarter of the Republican electorate. Despite his commanding debate performances and general election promise, his support in primary polls has rarely surpassed 26%, which is close to where he peaked in 2008. He does not pick up new backers when support for opponents like Rick Perry or Michele Bachmann fades. What’s going on? It’s the evangelicals, stupid.

previousWill Evangelicals Doom Romney?nextMorning Must Reads: Burdenblog comments powered by Disqus The Page Updated 3 hours agoPerry Plays DodgeballPerry Doubts Cain Can WinNYC official: Protest cleanup is being postponedFri. Candidate ScheduleON THE SUNDAY SHOWS More on TIME.comWall Street: Photos from the ProtestsBefore Wall Street: America's Top 10 Protest MovementsEarthquake Rattles BaliFull ListMost PopularTIME.COMBLOGSSwampland Scientists Discover a Diamond as Big as a PlanetMandela: His 8 Lessons of LeadershipWhy You Should Worry About China's Real Estate Bubble BurstingThe Saudi-Iran Cold War: Will the Assassination Plot Heat It Up?Dilma vs. Gisele: The War over Brazilian WomanhoodTeacher, Leave Those Kids Alone: A Look at South Korea's Education SystemSteve Jobs, 1955?2011: Mourning Technology's Great ReinventorKazakhstan Passes Restrictive Religion LawNew Proof That Comets Watered the EarthThe Supreme Court: When Double Jeopardy Isn't Double Jeopardy Harold Camping's Back, With a Brand-New Doomsday PredictionWhat's Behind Violence at the World's Largest Gold Mine?Will the Washington Bomb Plot Force Obama into War with Iran?Reality Check: The Cain Train Is Going to WreckOccupy Wall Street: Police and Protesters Face Off Over Cleaning'Magic Mushrooms' Can Improve Psychological Health Long TermWealth Matters, Part 2: Materialistic People Are Less Happy in MarriageTeen Sex Update: Fewer Teens Doing It, More Boys Using CondomsWhy Occupy Wall Street Is More Popular than the Tea Party*Herman Cain's '999 Plan' Looks a Lot Like Sim City's 999 PlanWhy Occupy Wall Street Is More Popular than the Tea Party*TIME Poll: Obama Leads Head-to-Head Matchups with Republican RivalsReality Check: The Cain Train Is Going to WreckAnita Perry Gets Candid, Claims Christian VictimhoodThe Conservative Problem with 9-9-9What You Missed at the GOP’s Dartmouth Debate: Used Milk and the Texas TurtleThe Cain MutinySantorum Not Familiar with Catholic Teaching About the PoorIs Romney Really the Inevitable Nominee?Can Perry Win If He Can’t Debate? VideosMore Videos Powered by WordPress.com VIP Stay Connected with TIME.comSubscribe to
RSS FeedsSign Up for
NewslettersGet the TIME
Magazine iPad EditionRead TIME Mobile
on your PhoneBecome a
Fan of TIMEGet TIME
Twitter Updates NewsFeed U.S. Politics World Business Money Health Science Entertainment Photos Videos Specials Magazine © 2011 Time Inc. All rights reservedPrivacy PolicyRSSNewsletterMobileTIME For KidsLIFE.com SubscribeContact UsTerms of UseMedia KitReprints & PermissionsHelpSite MapAd Choices TIME Our partners CNN CNN MONEY LIFE

The Cain 9-9-9 Plan: How Much Would the 99% Pay

Republican presidential candidate and businessman Herman Cain (Adam Hunger / Reuters)

The 9-9-9 tax plan of Herman Cain, the former CEO of the Godfather's Pizza chain who is now running for president, has a $29,000 problem. That's roughly the difference between how much more the average American family would pay and how much less the richest 1% would pay Uncle Sam each year under the tax overhaul proposed by Cain last week.

The catchy 9-9-9 title has in part helped Cain surge in the Republican primary polls. Cain says the plan would simplify the tax code, and lower all Americans' income taxes. What's more, Cain says his plan will generate the same amount of revenue for the government as our current tax system, which has income tax rates as high as 35%.

(SPECIAL: Suze Orman's Tips On How to Save (and Spend) Your Money)

The catch: Economists and tax policy experts were quick to point out that under Cain's plan, most Americans will actually pay more in overall taxes, even if they pay less in income taxes. The tax bill for the rich however is likely to drop - overall and on income. Just how much more most of us will pay and how much less the rich will pay is still unclear. The closely watched Tax Policy Institute, which is a joint effort of the Urban Institute and Brookings Institution, center-left policy-research centers, says it will be out with its analysis of the plan early this week. But here's what I can tell you so far, the 9-9-9 seems about the most unfair tax plan proposed since I have began covering the economy. Here's why:

To see why the Cain 9-9-9 plan is so unfair, consider what it would do to the tax bill of a family making $50,000 and one making just over $500,000. Edward Kleinbard, a tax expert at the University of Southern California, who amazingly has already written a 13-page detailed paper on the Cain 9-9-9 plan, says the average family of 4 making $50,000 under our current system pays $8,416 a year, after deductions, in both income and payroll taxes. That equals an effective tax rate of about 17%. Now take the top 1%. To meet that mark that family would have to earn $530,000. Under current tax law, taking into affect deductions like charitable giving and mortgage write-off, the top 1% pay an average of 29% of their income to Uncle Sam in payroll and income taxes. So, under current law the family making $530,000 will pay $153,700 a year in taxes.

(SPECIAL: The 10 Riskiest Ways to Lower Your Tax Bill)

Now to 9-9-9. The Cain plain lowers the income tax rate to 9%, and does away with the payroll tax. Nice. How does Cain pay for that? Well, he adds on the other two 9s - a 9% sales tax, and replaces corporate income taxes with a 9% business transaction tax, meaning instead of paying taxes on just earnings, businesses will now have to pay a 9% fee to the government for their net purchases every year. Most company's biggest purchase or expense is their workers, so it basically works out as a 9% payroll tax.

What would the $50,000 family and the top 1% have to pay? Well, under Cain's plan, the family earning $50,000 would see their income tax bill fall to $4,500. But they would also have to pay a 9% tax on everything they buy each year. Since most families of 4 on a $50,000 income spend nearly all of their income, that works out to another $4,500 in taxes. What's more, Kleinbrad figures that most companies have a fixed budget to pay for wages. So if the government adds on a 9% payroll tax, companies will simply pay 9% less in salaries to their workers. So for the family making $50,000, they pay another $4,500 in lower wages. Total 9-9-9 tax bill: $13,500, or $5,084 more than what they pay under the current tax system.

Apply the same math (the supposed bonus of the Cain plan is that we all pay the same simplified rate) and the family making $530,000 would have a tax bill of $132,500. But that's only if they spend every dollar they make, which is probably not the case. Most wealthy individuals save or invest a good portion of their income. That will go untaxed in the Cain plan. Assume the top 1% only spend half their income each year, and their tax bill drops to $119,250, or $34,450 less than they pay under the current tax system. What's more, the richer you are the larger you would see your tax bill drop.

(MORE: Why Do We Pay Taxes?)

So why would Cain want a plan that shifted the tax burden from the rich to the poor if it is not going to generate any more income for the government? One answer is that Cain says sales taxes are easier to enforce. It is certainly true that our current system is a confusing mess with plenty of ways to dodge paying. But what about a black market. Having spent his entire life in the restaurant business, surely he's heard a story or two of restaurants that don't report their sales to the government. Has he ever hired a contractor?

Cain says his plan may not result in lower wages, because companies will have more money to pay employees because they no longer have to pay income taxes. That's possible, but economists say that's not what has happened what has happened in the past. Generally corporate transactions taxes, which are popular in Europe, result in lower wages or higher prices, or both.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME's Facebook page and on Twitter at @TIME.