Xi’s European Tour and the Splintering of the European Union

3 April 2019 Lindsay Hughes, Senior Research Analyst, Indian Ocean Research Programme

Background

President Xi of China has wrapped up his trip to Europe, during which he visited Italy, France and Monaco. He signed multi-billion-dollar contracts with Italy and France, but in so doing, has exposed the widening rifts in the European Union that have, until now, been papered over by its various governments and institutions.

Italian Prime Minister, Giuseppe Conte, consensus leader of the coalition, looked on while Deputy Prime Minister, Luigi di Maio, signed a memorandum of understanding with He Lifeng, Chairman of China’s National Development and Reform Commission, to endorse China’s Belt and Road Initiative (BRI). Mr Conte, however, may only be the nominal leader of Italy. The real power lies with his alliance partners: Mr di Maio, leader of the Five Star Movement and Mr Matteo Salvini, leader of The League.

French President Emmanuel Macron, on the other hand, while signing multi-billion-dollar agreements with China, cautioned fellow European leaders against becoming part of its BRI or allowing China to acquire European infrastructure.

Comment

While it is easy to disparage Mr Conte’s decision to make Italy a part of China’s BRI, it is equally easy to understand why he chose to do so. Italy is cash-strapped and debt-ridden, its infrastructure is crumbling and it faces a number of social problems, having been, until recently, the preferred immediate destination for refugees streaming out of Africa and headed towards Europe. Mr Conte’s overarching drive to repair Italy’s economy, saw him sign agreements worth 2.5 billion euros (nearly $4 billion) with China. Mr Xi signed a further thirty deals, including ten with Italian companies and others with ministries and public bodies. Mr Di Maio said the deals were worth an initial 2.5 billion euros, but had a potential value of 20 billion (approximately $32 billion).

Those deals notwithstanding, it is the other deals that are, arguably, of greater interest. Italy’s state lender, Cassa Depositi e Prestiti (CDP), signed an agreement with Bank of China to let it sell “panda” bonds: debt sold by foreign entities to investors in mainland China. That would allow China to acquire foreign direct investment at a time when its economy is faltering, despite its claim of GDP growth of between six per cent and 6.6%. It would also make the Chinese currency more freely traded in Europe.

The Italian bank announced that it would issue bonds worth five billion renminbi ($1 billion). CDP and Italian gas company, Snam, signed a memorandum of understanding with the Chinese Silk Road fund to co-operate on international investments in China and in the 120-odd countries that have already signed up for the BRI. Snam and the Silk Road Fund said that they would consider co-operation in the natural gas sector, especially pipelines, storage facilities, LNG infrastructure and biomethane plants.

Most interesting of all, however, the China Communications Construction Company signed two co-operation agreements with the port authorities of Trieste and Genoa, thus acquiring access to those ports. Through those ports, China will have strategic access to landlocked countries, including Austria, Hungary and the Czech Republic. That would fit well with China’s interest in enhancing its activities in those countries, especially the latter two where it has strategic interests, including a research centre for its telecommunications company, Huawei, in the Czech Republic and rail network and financial interests in Hungary.

Italy’s act of endorsing the BRI is not purely symbolic; it has political value. While the memoranda signed generally have no legal value, some of their aspects, such as those that pertain to the electricity sector are legally binding. That, though, is relatively minor. For China, Italy’s decision to join the BRI is nothing less than a coup; it is the first G7 country to sign on to the BRI and lends weight to the possible perception that China’s economic prowess, like its BRI, is unstoppable.

In France, Mr Xi and Mr Macron signed fifteen deals worth $63.6 billion, including contracts for renewable energy, shipping and banking, as well as an order for 300 Airbus aeroplanes. The last of these comes in the wake of the grounding of the Boeing 737 Max-8 aircraft, following two crashes in Ethiopia and Indonesia. There could be little doubt that a message is being sent to the US team and President Trump, that China will act decisively if the US attempts to coerce it into complying with its demands during their ongoing trade negotiations.

Their agreements notwithstanding, Mr Macron did not sign on to the BRI, saying that it did not meet international standards. European Commission President Jean-Claude Juncker stepped up his criticism of Chinese trade practices just days after Mr Xi tried to soothe European concerns in Paris. At a 26 March meeting with Mr Macron and German Chancellor Angela Merkel, he stated that ‘it can’t stay like this, that Chinese companies have free access to our markets in Europe, but we don’t to the markets in China’.

What Mr Xi has achieved, nevertheless, is to widen the growing schisms between Brussels and Berlin, on the one hand, and the peripheral EU states, such as the Visegrad countries (Czech Republic, Poland, Hungary and Slovakia), Greece and, now, Italy. By investing in those countries, China has offered them an alternative source of funding and, arguably more importantly, the opportunity to stand up to Brussels and Berlin. Hungary can now reiterate, for instance, its hardline stance not to accept the illegal immigrants that Berlin says it must. Also, Greece is now not as dependent upon Brussels and Berlin for its economic handouts and the terms that go with those funds.

By further fracturing the European Union, Mr Xi has made China a larger factor and more influential player in Europe’s decision-making processes. To that extent, at least, his European trip was an outstanding success.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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