Italy to sign memorandum of understanding with China


By Alexander Wolfe | Staff Columnist 

I won’t let one Justice Department release bury what should be last month’s biggest international news. Italy has announced that it intends to sign a so-called Memorandum of Understanding with China as part of China’s One Belt, One Road initiative. As the final legacy of the Empire of Rome falls, let’s take a look at the actual significance behind this deceptively benign piece of paper. Between the photographs, handshakes and seething anger on behalf of NATO and the EU sat a 29-section document representing Italian endorsement of Beijing’s gargantuan infrastructure plan.

The document outlines cooperation between the two nations’ financial sectors, a deal in which a Chinese construction firm will work in Italian ports and even collaborate between Italian and Chinese media. Suddenly, Chinese influence seems a lot more pronounced in Europe to the dismay of the other G7 nations. Though Italy is arguably the weakest among them, the significance of a G7 economy signing on to the BRI is not long among other small European nations. It seems possible to deal bilaterally with the Chinese while maintaining EU membership.

Like most, I’m tremendously surprised by the sudden Italian move toward the East, but in hindsight, it’s not without cause. In 2012, Germany pressured the rest of the EU into signing an agreement called the Fiscal Compact. In short, it prohibits member nations from printing money, which sounds responsible until you realize that printing money is how most nations boost their economies in the event of economic catastrophe.

Most economists agree Europe’s recovery from the Great Recession has been slower because they’ve been cutting their spending to afford the unfortunately necessary financial sector bail-outs. By forbidding EU nations from printing money, the value of the euro remains relatively stable, but unemployment explodes, and real growth completely disappears.

Italian GDP growth has lagged behind EU growth for the better part of a decade, and the country has actually entered a small recession, experiencing their second quarter of negative growth this January. Without the fiscal tools necessary to cure its domestic economic woes, is it surprising that the Italians turned to funding outside the EU?

Brussels and Washington can “express fury” all they want, but the Chinese now have a substantial foothold inside the Eurozone (sorry Montenegro) which they can advertise across the developing world as a guaranteed pathway to capital-rich European markets.

Italy could become the major intermediary between Europe and African markets, as African nations begin to expand their export capacity. Even in a world without tariffs, the trade would generate extensive, well-distributed revenues for Italy. Morgan Stanley has estimated that in order to be profitable, the whole plan should generate at least 2 trillion USD per year in trade, and if even a third of that trade is traveling through Italian ports, the service-based Italian economy stands to generate a sizeable increase in GDP, specifically consumption.

The downside, of course, is that Italy has basically flipped the bird to its historical, diplomatic allies. While turning at a key moment in conflict is sort of Italy’s gimmick as a nation, the geographic proximity between Italy and the fuming representatives at Brussels places a great deal of pressure upon a fledgling Italian government.

It’s difficult to tell how this will play out on the global diplomatic stage, but with the United Kingdom muddling through Brexit talks this month, the EU, specifically Germany and France, is likely to have little patience for dissension within the ranks. The EU has a relatively well-managed free trade agreement with China, but I don’t know of any European politician advocating for imported Chinese labor. China’s weak labor protections and historically low wages do not gel with Europe’s high rate of unionization.

All in all, it’s difficult to predict much beyond what’s been publicly addressed in this memorandum, but it does set a concerning precedent for European leaders wary of China’s creeping westward influence.