Italy, the Belt and Road program, and China – My weekly column

Italy’s moves to sign a deal with China and get involved in its Belt and Road Initiative (BRI) are highly significant as Italy is the first of the European Union’s founding countries to join this program. By way of reminder, the Belt and Road Initiative aims to develop stronger trade between China and various other regions of the world. Italy is the 12th European Union country to get involved in this program. Meanwhile Greece, Hungary and Poland are not opposed to it, and rail transport between Chengdu and Lodz has increased considerably over the past five years due to trade between the two countries. However, Sweden is fairly opposed to the Chinese program, while France and Germany are reacting cautiously – probably as they see potential business and trade opportunities, but also the restrictions involved in the program as it is primarily dictated by China.

The value of the Italy-China agreement is not yet huge and does not reflect a firm commitment between the two countries, but it has already caused some strife in the Italian government between Di Maio who went all out to promote the agreement, and Salvini who wanted none of it.

China sets great store by this international drive and the country’s role in the global balance, and when Xi Jinping set up the BRI in 2012 just after he took over as President, he put this world view center-stage again. His aim then as now is to root China’s fresh phase of growth within a broader context and link it back to the country’s development more than 2,000 years ago when the growth of the Silk Road network shaped Asia, sprawling out as far as Europe. During his recent visit to Europe, Xi Jinping was keen to remind listeners of the very long-standing relationship between Rome and the Han dynasty, which ruled from 206 BC to 220 AD, and he also referred back to the rich 13th century Venetian merchant Marco Polo’s trip to China. He took great pains to mark the country’s historical ties with Italy, but also China’s long-standing influence and role across the globe.

China’s incursion into Europe via the BRI obviously raises questions on the relationship between the two regions: targeting one of the EU founder countries marks a new milestone, especially as Italy has already been on the receiving end of quite a bit of China’s investment in the region. The UK has traditionally been China’s favorite focus for investment since 2000, with a total of €59.9bn up to 2018 according to Merics, but Italy ranks third with €15.3bn, just behind Germany’s €22.1bn, while France is fourth with €14.3bn.

However, Italy’s political choice raises a number of questions.

Is this decision a way to divide Europe amidst a global backdrop where doubt already prevails over European harmony? Several countries no longer want to comply with EU rules as strictly as they did before: Italy is a case in point, but we could also mention Poland, Romania and a few others. Considering European wariness of China, could this be a way for it to drive a wedge between the countries of Europe? This is a valid question as by promoting an easing of European-led restrictions, perhaps China could gain some more leeway to implement its worldwide growth strategy while also shoring up its international position…

Well may we wonder then whether Italy’s move is also a way for Southern Europe to put pressure on Northern Europe and the European Commission, as the region could use the relationship with China to gain leverage – particularly Italy, as tension with Brussels has soared since the coalition government took over.

China has already invested in the port of Athens (Piraeus), the port of Sines in Portugal, the port of Valencia in Spain, and has taken a foothold in the industrial port of Venice (Mestre-Marghera). The country – alone or sometimes via Hong Kong – now owns or manages 10% of European ports, while there are also bids to manage even more. This is a hefty figure and these moves could fuel imbalances and pressure between European states in a less harmonious Europe.

So all this begs the question whether China’s behavior as it seeks to extend its influence is a reflection that Europe is relegated to second place. The old continent harbors strong purchasing power, but it is divided despite the European institutions and does not seem to have a role to play in the tech battle between China and the US. So is this a way for China to disrupt Europe’s supposed unity with the US and move forward in the technological war, which will ultimately lead to China’s technological domination in Europe as it asserts its worldwide position? We recently saw threats from the White House – particularly to Germany – as it sought to stop the use of Huawei equipment when renewing mobile phone infrastructure.

Lastly, the key point in the Italy-China agreement is the port of Trieste, an industrial free zone that is set to be China’s bridge into Italy. Trieste boasts major advantages that Piraeus does not have, and these explain much of why Chinese investments in the port of Athens ended in failure. Firstly, the port of Trieste is already part of a broader industrial framework: secondly, there is a much more extensive rail network than in Greece, which makes Munich closer via this route than if getting there from Hamburg, in terms of both time and distance. In other words, Trieste is close to southern Germany, northern Italy and south-east France, and the route from Shanghai to Trieste is almost 10 days shorter than the route to ports in the north of Europe. This is very important and could put Trieste in a position to rival with Rotterdam or Hamburg, and this factor could play a crucial role in shaping the new European landscape.

This post is available in pdf format My Weekly Column – 1 April

The agreement between the European commission and the Italian government is a bluff

Despite the agreement between the Italian government and the European Commission, the question of the Italian public debt sustainability is not solved. The marginal move from the government (reducing its budget deficit to 2.04% of GDP vs an initial 2.4%) is not sufficient to explain it.

The best explanation is that no one wanted to have the responsibility of a deep European financial crisis linked to the lack of liquidity of the Italian debt market The commission has accepted because the situation was not manageable.

In the short term, investors will be pleased and the spread with the German Bund will narrow. But the main question is not solved. Growth in Italy is too low.

The Italian economy is already in recession (GDP growth was negative in Q3 and companies’ surveys are on the contracting side of the economic activity) this means that the budget deficit will converge to 3%, not 2%

The question on the debt is that interest rates are higher than the GDP nominal growth. Therefore the public debt to GDP has a growing bias(a snowball effect). Italy has had a primary budget surplus for years, it is not the question. For Italy a sustainable path for its public debt must find a way to make the government credible in order to limit the premium on its interest rate and to find a way to boost its growth. Who can imagine that? Be prepared then for the next financial crisis it is coming

Three points on Italy, its budget and the European Commission

The European Commission has just told Italy to revise its 2019 budget plan: the deficit does not look excessive (2.4%), but the figure is deemed to be fragile as growth projections are overly optimistic….and with a government that emerged from a watershed vote, we should expect a certain degree of laxity on spending to boot. The government was not elected to do the same thing as its predecessors, i.e. there is a risk that the budget will spiral out of control and move above the notorious 3% of GDP threshold, which is incompatible with a stabilization in public debt. Italian public debt stands at close to 132% of GDP, well above the standard 60%, and this is not sustainable. Yet does a sustainable trend automatically involve a drastic cut in the public deficit? Maybe not.

There are a number of points worth raising on the budget/Italy/European Commission issue.  Continue reading

French public debt stands at 100% of GDP – My Tuesday column

This post is available in pdf format My Tuesday Column – 1 October 2018

French public debt stands at close to 100% of GDP, but is this really a cause for concern?
No – it is important not to overstate the importance of this figure. French statistics body INSEE made the news as it measured public debt at over 100% of GDP for 2017, when it included railway operator SNCF’s debt. However, this is no longer the case, with debt accounting for 99% of GDP in the second quarter of 2018.
The chart shows two phases in French public debt trends – before and after the 2008 financial crisis. The State increased its debt issues and thereby smoothed the way for macroeconomic adjustment to the crisis by spreading out the shock that hit the French economy over the longer term.
We can see that the figure then rises again after 2010, but this is not a specific feature to France. It reflects slower growth in the French economy over the longer term, and a welfare set-up that failed to change to adapt to this new trend: so soaring public debt denotes a sluggish adjustment from French institutions.
In other words, the primary role of public debt is to help spread the load at times of economic shocks, but it skyrockets when the economy is slow to adjust to new economic conditions.dettemaastrichtFrance-en.png

Is the 100% of GDP threshold a problem or not?
The figure itself is impressive and somewhat symbolic, but it is not necessarily damaging for economic momentum per se. Japanese public debt stands at 240% of GDP, yet the country has come through the financial crisis better than others judging by per-capita GDP: the country does not seem to be in danger of default.
The real problem is that we do not know just when public debt can actually become detrimental. Rogoff and Reinhart indicated in their research that public debt begins to dent growth when it moves beyond 90% of GDP, and this rule at least partly spurred on the European Commission’s austerity policy in 2011 and 2012. However, this argument does not hold water: R&R’s calculations were wrong and there is no rule on excessive public debt. Continue reading

Italy: Growth expectations are too optimistic

Here is the frightening part of the Italian budget: growth figures. In an interview Giovanni Tria said that growth forecasts for 2019 and 2020 were 1.6% and 1.7% respectively.

These are unbelievable expectations. Such numbers were attained only in period of global euphoria (2006) or of global recovery (2010). This will not be the case in 2019 or 2020. The Italian GDP growth trend is just 1.1%. That’s why budget numbers are at risks.

We cannot bet on a 2.4% budget deficit in 2019, 2020 and 2021. We must have lower growth figures in mind and probably higher expenditures. The situation is at risk in Italy In other words, the reduction of the public debt (reduction of the public debt to GDP ratio by 1% every year ) will not be achieved.

https://www.bloomberg.com/news/articles/2018-09-30/italy-s-tria-tells-il-sole-he-never-threatened-to-resign

Seven points on Italian budget announcement risks

The Italian budget program, which sets out a budget deficit of 2.4% of GDP for 2019, 2020 and 2021, did not go down very well with investors. Uncertainty on Italy is making a comeback and the yield on the 10-year government bond rose sharply as shown by the chart below (as at 15.00pm CET today).

IMG_3776 (002).PNG
Source: Bloomberg

So just what are investors worried about? Continue reading

The balance of strength is now in favor of la Liga| Financial Times

League chief eclipses senior coalition partner with anti-immigration broadside

Matteo Salvini heads the junior coalition partner in the populist government that took office in Italy on June 1. Yet the leader of the far-right League has seized control of the political agenda — eclipsing the anti-establishment Five Star Movement led by Luigi Di Maio, which won nearly twice as many votes in the March elections but is struggling to project its voice in power.

Read it here www.ft.com/content/c8de2064-7303-11e8-aa31-31da4279a601