EU warning: China dubbed ‘potential saviour’ as ECB and Italy battle over pandemic relief

Coronavirus impact will be ‘very tough’ on Italy says expert

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Italy was the first European country to be hit by the COVID-19 pandemic last year, and the following national shutdown crippled its economy. Rome called on the EU for assistance, particularly as personal protective equipment (PPE) supplies ran dangerously low, but the bloc was slow to respond at a time when Italy was in desperate need. Instead, it was Beijing who answered Italy’s pleas and shipped 30 tonnes of medical equipment over to help fight the virus while the country’s hospitals were overwhelmed.

Italy’s foreign minister Luigi Di Maio is also pro-China, and declared in August last year that Beijing was a key strategic partner — pulling the two nations even closer together in the midst of the pandemic.

However, there is a concern Italy could be doing this at a cost to its relationship with the rest of the EU and the US.

Mr Di Maio was subsequently not invited to co-sign an opinion piece in The Washington Post last November, where his French and German counterparts declared the US and EU should have a coordinated approach to China.

Indeed, Dr Nicola Casarini, from the Istituto Affari Internazionali in Rome, explained how Italy’s closeness with Beijing “weakens the EU’s China policy”.

She said Italy intends to enjoy benefits from an alliance with the US, which will provide military support.

However, she claimed the nation always wants an economic tie to China, the US’ rival.

She said it intends to strengthen its commitments with the eastern superpower, even if that “creates uncertainty” with Washington, and potentially the rest of the EU.

Dr Casarini noted: “Italy’s forging closer ties with China has immediate implications for transatlantic trade relations.”

Speaking to The Diplomat, she said: “China is now increasingly perceived by some Italian politicians, in particular within the centre-left Democratic Party and the Movement 5 Stars (the two political forces supporting the current coalition government in Rome) as a potential saviour, should Italy’s debt fall under speculative attacks.”

Italy’s national debt increased to almost €2.57trillion (£2.2tn) at the end of last year, according to a recent Bank of Italy report.

This is an increase of nearly €160billion (£138bn) when compared to the nation’s debt at the end of 2019.

It spent an estimated €100billion (£89bn) to reduce the impact of the pandemic.

The country’s gross domestic product (GDP) shrunk by an estimated 8.8 percent last year.

Italy is also one of the world’s most indebted nations and has the highest total national debt in the EU in absolute terms.

Only Greece ranks above it in terms of the quantity of debt stated as a percentage of the nation’s GDP.

Its recovery is expected to hinge on the nation’s vaccine rollout programme and how quickly its trading partners will recover — China is the only nation to have enjoyed positive economic growth over the last year.

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Dr Casarini continued: “The proponents of closer Rome-Beijing ties hope in fact that China would come to rescue Italy, should the country fall prey to international speculation — an assumption based on several declarations, and unofficial promises, made by Chinese leaders to the Italian government in recent years.”

This could have significant implications for the EU, as Italy has been imploring the European Central Bank to consider wiping out government debt to help nations recover after the pandemic.

The closest aide to Italy’s former Prime Minister Guiseppe Conte, Riccardo Fraccaro, explained: “[The EU] monetary policy must support member states’ expansionary fiscal policies in every possible way.”

Speaking in November, he said this could include “cancelling sovereign bonds bought during the pandemic or perpetually extending their maturity”.

But, officials at the ECB’s headquarters believe it would be against EU law to do so.

ECB President Christine Lagarde said: “I don’t even ask myself the question — it’s as simple as that — because anything along those lines would simply be a violation [of the law].”

Italy’s finance minister also rejected the suggestion.

It’s worth noting that Italy is actually benefiting from the ECB’s emergency stimulus already, although the programme is temporary and could trigger investor pressure to rise on the country soon.

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Mr Fraccaro warned: “Italy could be exposed to speculative investments without ECB purchases.

“The central bank should always guarantee financial stability.”

This is not the first time Italy’s alliance with China has caused concern.

Dr Casarini cited the signing of the Memorandum of Understanding on the Belt and Road Initiative in March 2019, which was a significant moment as Italy became the first G7 nation to support the controversial plan.

Other European nations have been reluctant to sign on to China’s new initiative, with some EU officials condemning it as a “vanity project”.

Still, several Italian telecom operators have excluded the Chinese telecoms giant Huawei from a public procurement call for the development of its upcoming 5G networks, in line with the US’ warning that it could compromise national security.

However, Rome has notably not issued a blanket ban of Huawei, unlike other pro-US governments such as Boris Johnson’s.

But, Italy has a new Prime Minister, Mario Draghi, an economist who is respected within the EU.

He was praised for helping to resolve the eurozone crisis several years ago, and helping Italy and the other EU members dodge bankruptcy, meaning he could help unite his nation’s fiscal policy with the bloc.

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