News Analysis

In Italy, China is hoping for another strategic foothold in Europe

BERLIN - Facing a severe economic downturn this year, Italy is hoping for a lifeline from China.

By signing up to Beijing's Belt and Road Initiative (BRI), the right-wing populist government in Rome wants to make up for a significant lack of growth and investment.

Although the planned alliance with China has already sparked tensions with the European Union (EU) and the United States, the Italian government appears to be willing to take that risk.

Italy, one of the major industrialised nations and a member of the G-7, only a few days ago had to massively correct its economic forecast for 2019.

Instead of a gross domestic product (GDP) growth rate of 1.5 per cent, as predicted by the government in October last year, Rome would now be happy if it achieves zero growth.

The latest outlook by the Organisation for Economic Cooperation and Development (OECD) is even more bleak. It anticipates a 0.2 per cent contraction in GDP.

One of the major reasons for the troubles is the many economic uncertainties that are leading Italian citizens to become cautious consumers.

The country still has not recovered from the global financial crisis more than 10 years ago.



By signing up for Beijing's Belt and Road Initiative, the right-wing populist government in Rome wants to make up for a significant lack of growth and investment. PHOTO: EPA-EFE

According to a recent OECD report, Italy's GDP currently accounts for only 95 per cent of the pre-crisis level in 2007.

But Italy's debt has risen to 132 per cent of GDP, making the country the second-highest indebted member of the EU, outranked only by Greece.

By way of comparison, Greece's debt was 130 per cent of GDP in 2009, even before the full effect of the global financial crisis hit the country and drove it into a debt crisis.

Italy can still manage its debt, as long as interest rates stay low. But once the rates go up, the state Budget, to a large degree, will be eaten away by debt servicing.

Armed with that knowledge, Italians have been reluctant to spend.

Against this backdrop, the government in Rome is looking for alternatives to boost exports and one of them involves closer cooperation with China.

President Xi Jinping's visit to Italy last month was not just an opportunity to sell Italian goods like meat and oranges to China but also gave Rome a chance to try to correct the trade imbalance that is significantly in China's favour.

Thus, Italy became the first political and economic heavyweight in the EU and among G-7 nations to sign a memorandum of understanding with China to officially become a member of the New Silk Road project BRI, designed to better connect Asia with Africa and Europe.

The signing, however, runs counter to the EU policy that is advocated when dealing with China. EU members are supposed to speak with one voice and act as unanimously as possible.

Europeans are increasingly wary of China's real intentions when investing in the EU.

Chinese investments are not only seen by the EU as being driven by economic opportunities but also an attempt to establish a political foothold in Europe in order to exert pressure.

 

This perception is reflected in a recent EU Commission document - EU-China: A Strategic Outlook - where Beijing is mentioned as a "systemic rival promoting alternative models of governance".

This marks a clear reversal of the previous perception of China as a "strategic partner".

The Commission paper recommends a "flexible and pragmatic whole-of-EU approach enabling a principled defence of interests and values".

Earlier this year, Germany's Economy Minister Peter Altmaier announced that his government will take a stronger stand in protecting national interests, and intervene if there are attempts of a corporate takeover in a sensitive area.

He said he regrets that the country was unable to prevent the takeover of certain German companies by Chinese investors.

He singled out Kuka AG in Bavaria, a key mechanical engineering company with approximately 14,000 employees worldwide, which in 2016 was acquired by Chinese investor Midea.

In future, Mr Altmaier said, Germany will consider stepping in if sensitive technology companies face a takeover by Chinese companies.

In February this year, the European Parliament approved a proposal to screen foreign investments at the EU level, clearing the path for closer monitoring of third-country companies looking to invest in critical sectors.

The proposal for the first time will allow the EU to collectively address investments that represent potential risks to the bloc's security or public order.

Raising eyebrows, Rome abstained from voting on the matter, a departure from previous Italian governments' support for the bloc's collective decisions.

With Italy possibly joining the Silk Road project, China may now have a loophole to further penetrate European markets.

This "is an open competition for global leadership, and a way to reshape the international system, putting China at its centre", wrote Valbona Zeneli, chair of the Strategic Initiatives Department at the George C. Marshall Centre in Garmisch-Partenkirchen, Germany.

 
 
 
 

Both the EU and the United States are concerned that China will now be able to secure strategic acquisitions, in particular, in the central and southern European countries, which have been targeted by Beijing. By taking control of shipping ports in those countries, China could gain access to critical points of entry into the EU.

According to Mrs Zeneli, the Chinese flagship project is the Five Ports initiative, which involves the Italian ports of Venice, Trieste and Ravenna, plus Capodistria in Slovenia and Fiume in Croatia.

Getting Italy on board is therefore a major prize for China, which is also ready to provide financing for the BRI projects.

Given the poor state of Italian banks, this could lead to a strong dependency on Chinese financing.

In 2018, the EU released a report on the New Silk Road Initiative in which it accused Beijing of not being transparent about its intentions, opaque with regard to public tendering and out to serve Chinese interests only.

Brussels, in particular, is worried that by accepting loans from China, participants could fall into a debt trap.

This seems to be the case already in some Asian countries, for example Sri Lanka, Pakistan and Kyrgyzstan.

With Italy abstaining from voting on the European Parliament's proposal to screen foreign investments at the EU level, the EU-China summit on April 9 could turn into a rather contentious meeting.

EU leaders may find themselves busier maintaining internal unity than conveying a clear message for Beijing.

At least this time, the EU can count on backing from the US.

US ambassador to Italy Lewis M. Eisenberg recently said: "There is sorrow that Italy has become the first G-7 country to sign the Silk Road agreement."

He added ominously: "There will be long-term implications."