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Economy

Europe in an Economic Cold War?

Apr 02 , 2019

In 1992, distinguished US scholar and historian Walter LaFeber posed the provocative question: An End to Which Cold War? In the thought-provoking essay, LaFeber emphasized European dependency relationships concerning security and global markets. Though US and Soviet bipolarity had faded into history, today there is also an “ongoing struggle…between the United States and the European countries to determine the kind of Europe that should evolve,” especially as the continent encounters Chinese direct investment opportunities through Beijing’s Belt and Road Initiative (BRI). Bilateral trade between China and Italy hit a record $54.23 billion in 2018, and the Rome-Beijing agreement last week will undoubtedly expand this figure in 2019. Europe is revaluating its options concerning international commerce.

In total, Xi and his Italian counterparts completed 29 deals worth approximately $2.8 billion in the sectors of agriculture, finance, and energy, and secured additional access to Chinese markets for Italian energy and engineering firms. The China Communications Construction Company (CCCC) will also develop and manage Italy’s largest port in Genoa and attempt to revive Trieste along the Slovenian border as an export hub into Central and Eastern Europe.

Italy’s state lender, Cassa Depositi e Prestiti (CDP), also signed an agreement with the Bank of China to allow the sale of “Panda” bonds, a name for debt sold by foreign entities to investors in mainland China. CDP will issue bonds worth 5 billion renminbi ($744.5 million). CDP and Bank of China will also co-finance Italian companies for 4 billion renminbi.

Also, the Italian plant-builder, Danieli, will construct a steel plant in China which will eventually move to Azerbaijan, and China’s Suning e-commerce group will more heavily promote Italian exports and tourism. The deals also included calls for cooperation between Chinese and Italian companies in gas turbine technology and wealth management.

Worries in Washington

Earlier this year, both US Secretary of State Mike Pompeo and Vice President Mike Pence warned European allies about political and economic indebtedness to China and Russia concerning telecommunications, direct investment, natural resources, and security. In March, just before President Xi’s visit to Rome last week, US National Security Council spokesman Garrett Marquis stated that Italy did not need to "lend legitimacy to China's vanity [BRI] infrastructure project.” Opponents of the BRI in Washington view the global infrastructure plan as a geopolitical instrument for strategic influence, and label the high levels of debt owed by African and South Asian nations to China as economic evidence of Chinese domination.

In sum, the Cold War LaFeber described almost thirty years ago is alive and well, but the choice is between maintaining the old post-WWII order or shifting to Beijing’s proposed 21st century Silk and Maritime Roads. The latest and most symbolically significant development of this conflict occurred this past week when President Xi Jinping visited Rome to welcome Italy, a G7 economy, into the $1 trillion BRI. As Professor of Global History at Oxford University Peter Frankopan suggests, “the seemingly innocuous move comes at a sensitive time for Europe and the European Union, where there is suddenly a great deal of trepidation not only about China but about working out how Europe or the EU should adapt and react to a changing world."

Last month, the European Commission released a joint statement on "China's growing economic power and political influence.” It presented a single unified agenda in which it deemed China a “systemic rival,” and recently, both Berlin and Paris expressed firm positions concerning Chinese investment as the China-US trade war continues. However, Italy, among other EU states, is pursuing a more independent foreign policy.

Economic and cultural relations between China and Rome go back 2,000 years when the ancient Silk Road connected them. In a letter addressed to the Italian people in the daily, Corriere della Sera, President Xi called for a win-win “global strategic partnership” focused on infrastructure, telecommunications, and ports, among other things. With the Italian entrance into the BRI, Europe is split on economic neutrality between the East and West.

Despite US concerns, thirteen European countries have already ‘opened up’ to Chinese investment, and choices between traditional Western partners and the East are threatening a solid, continental consensus on issues such as telecommunications infrastructure or foreign investment screening.

Chinese Benefits and Italian Needs

The Italian endorsement grants China additional legitimacy in its pursuit of reshaping international trade and facilitates China’s penetration of western markets with crucial infrastructure projects like the ports of Genoa and Trieste.

After the Morandi Bridge in Genoa collapsed and tragically killed 43 people last August, the topic of infrastructure investment has reentered mainstream Italian politics. Combined with the recession which hit Italy at the end of 2018, the populist coalition government, dominated by the Five Star Movement and the Northern League, searches for foreign investment to revitalize the economy. Italian national debt is among the highest of the Eurozone.

The coalition, which entered power in June 2019, hopes to integrate port cities like Trieste and Genoa into the proposed Chinese maritime routes. Advocates look to the successes of the Greek port of Piraeus which grew in activity fivefold after Chinese firms acquired 51%.

Michele Geraci, the Italian undersecretary at the Ministry for Economic Development, argues that the BRI is an “opportunity for our companies to take the opportunity of China's growing importance in the world." Geraci also notes the hypocrisy of EU critics who benefited from large amounts of Chinese investment but disapprove of Italy’s signing of the memorandum of understanding (MoU) this past week.

Deputy prime minister, minister for economic development, and Five Star Movement leader, Luigi Di Maio, and Minister of Economy and Finances, Giovanni Tria, along with Prime Minister Giuseppe Conte, all support the deal enthusiastically and believe it will increase Chinese investment in Italy and provide increased access to Chinese markets and raw materials.

However, not everyone in Rome is thrilled about the deal. Interior Minister Matteo Salvini and leader of the Northern League emphasized that he did not want to see foreign countries “colonizing” Italy. Salvini, a supporter of the Trump administration in the US, also expressed security concerns surrounding mobile phone data related to Huawei’s involvement in Europe.

European Union Hypocrisy

However, while overall Chinese investment in Europe decreased this past year, activity grew in many European countries. Just last year, Chinese investors made acquisitions worth $1.83 billion in France, up 86 percent from 2017. Chinese direct investment in Germany totaled $2.52 billion, up 34 percent, while in Italy investment was down 21 percent to $800 million.

The numbers suggest that the French and Germans are hypocritical in criticizing Italy over the signed MoU. Referencing Xi’s Italian visit, French officials have described the Rome-Beijing accord as a breach of “a united front against China’s pursuit of economic domination,” however as the numbers indicate, Italian investment is only a fraction of overall Chinese activity in France or other European states.

Sovereignty and Self-Interest

Similar to prior policies of other Euro-sceptic governments, an Italian deal with China demonstrates economic independence from the EU bureaucracy. Populists might argue that Italy should not depend on EU subsidies to reform its infrastructure and revitalize its economy.

Similar pivots have occurred concerning EU migration and fiscal policy. Geraci had stated that he did not want a single EU policy on investment screening: “We have 28 different economies with 28 different interests,” he said, but assured that all business dealings would occur “within the scope of our existing alliances with the EU, with NATO.”

Italy, similar to Hungary and other EU states, pledges to remain loyal to the US and NATO but is seeking to deviate from Western views to maximize national interests. In the context of LaFeber’s 1992 article, and as emphasized by Italian journalist Alessandra Bocchi, Washington seems to be less dominant in dictating Europe’s foreign policy. Indeed, Europe sits as a battleground between the China-US trade war. Though the US adversary has changed, European dependency relationships, just like during the Cold War, are again dominating world affairs, and LaFeber’s concerns lasted deeper into the 21st century than initially expected.  

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