America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
Within the EU, Italy is often the source of headaches: fiscally unreliable, politically unstable, and in perpetual economic stagnation. Yet in the aftermath of a pandemic that has taken a significant economic toll virtually everywhere, forecasters expect the country’s GDP to grow by 4.5 percent in 2021 and by almost the same amount in 2022. Within the G-7, Italy’s expected performance is second only to that of the United Kingdom. Such an optimistic economic forecast would probably not have been possible without the 191 billion euros (between loans and grants) that Italy received to address the COVID-19 crisis—part of the largest stimulus package ever put in place in the eurozone.
Fortune may favor the brave, but the European Union favors a capable technocrat. Had anyone but Italian Prime Minister Mario Draghi, the former president of the European Central Bank, approached the European Commission with a recovery plan as ambitious as Italy’s, most likely the idea would have been dismissed as a joke. Germany and other countries presented more traditional investment proposals meant to directly address the consequences of the pandemic. Italy’s leadership, however, decided to use the fiscal stimulus to increase the country’s historically low productivity, improve the health sector’s resilience, accelerate a green transition, and push forward politically sensitive structural reforms. So far, Draghi has been able to hold together a large and diverse governing coalition and find space for compromise. No party, after all, wants to give up its say in the management of EU funding.
The long-term economic impact of these policies will be an important part of Draghi’s legacy. But having established a strong domestic position, his government is also beginning to strengthen Italy’s foreign policy. Draghi brings to the job a renewed appetite for European integration, a close alignment with the United States, and a recognition of Rome’s role in the intensifying contest between China and the West. As the EU’s other heavyweights, France and Germany, focus their attention on elections this year and next, Italy is poised to wield increasing influence over Europe’s internal affairs and its engagement with the world.
The current government in Rome has the potential to reinvigorate both intra-European and transatlantic relations. To start, the success of Italy’s economy could open up an avenue for further integration of the eurozone and change the way the bloc manages economic crises. If the country’s structural reforms manage to increase productivity and reduce economic inequality—without falling into the common traps of corruption and misallocation of EU funds—its experience could strengthen the case for turning the EU’s COVID-19 response mechanism, the Recovery and Resilience Facility, into a permanent tool, ready to be used again in the next emergency. Until now, eurozone members have shared a monetary policy but maintained separate fiscal policies. Establishing the recovery facility—which includes a combination of loans and grants financed through the EU budget—required a historic compromise between the bloc’s fiscally conservative members, including Germany and the Netherlands, and countries such as Italy, Portugal, and Spain, which were forced to adopt austerity policies after the 2008 financial crisis and whose economic performances have lagged in the years since. In the wake of that crisis, stagnation and the persistence of social inequalities fueled the rise of populism, nationalism, and Euroskepticism. Eurozone countries did not want to make the same mistake again. Italy received Europe’s largest aid package to finance its ambitious recovery plan, spearheaded by the same man many credit with saving the euro a decade ago. If Draghi’s latest program continues to deliver, it will entrench the EU’s turn toward coordinated fiscal policy.
Italy’s emphasis on inclusive and sustainable growth comes just as the world is making progress on global finance reform. As chair of the G-20, Italy oversaw a historic agreement on corporate taxation at this year’s ministerial forum in Trieste, building on an earlier agreement among members of the G-7. The plan targets the profits that a company makes in end markets—the countries where its goods or services are consumed—thus addressing the problem of undertaxation of U.S.-based technology firms and European luxury good producers. Although the framework agreed to in Trieste is still subject to the oversight of the Organization for Economic Cooperation and Development and the approval of individual governments, it represents an important diplomatic success for Italy’s leadership. To keep up the momentum at next month’s G-20 summit in Rome, Italy aims to secure a deal to limit the creation of tax havens, closing another significant tax loophole exploited by multinational corporations.
The Draghi government has put a similar emphasis on addressing climate change. At home, it dedicated an ad hoc ministry to focus on the transition to clean energy. Abroad, Italy’s priorities overlap with the policies put forward by the progressive wing of the U.S. Democratic Party, particularly in the areas of energy efficiency, decarbonization, and protection against environmental disasters. The Italian Minister for Ecological Transition Roberto Cingolani and Minister of Foreign Affairs Luigi Di Maio signed a joint declaration with the U.S. climate envoy John Kerry in Rome, affirming the two countries’ joint commitment to cooperate on increasing investment in the fight against climate change. Representatives at the G-20 meeting in Naples in July unfortunately failed to approve a broader deal. But as the next UN climate summit, COP26, approaches—Italy is cohosting the meeting with the United Kingdom—Rome’s green investments serve as an example for other countries that have been dragging their feet on the climate issue.
Italy is poised to wield increasing influence over Europe’s internal affairs and its engagement with the world.
Beyond collaboration with the United States on environmental issues, Italy is well placed to take the lead among European nations in repairing the transatlantic relationship. Long-standing disagreements—such as Germany’s support of the Nord Stream 2 pipeline project and its push for an EU-Chinese investment agreement—and anger over both the U.S. departure from Afghanistan and the exclusion of France from the Australian-UK-U.S. defense agreement may make it more difficult for other European capitals to mend ties. But compared with Berlin, London, and Paris, Rome has been less distant from Washington. Italian government ministers defended Washington’s decision to withdraw and recognized the sacrifice of Italian troops in Afghanistan, where Italy was deeply engaged for two decades. Italy was less affected than many of its European peers by the deterioration of relations under U.S. President Donald Trump, too. Rome never joined the European Airbus consortium, whose dispute with the American company Boeing was settled by the World Trade Organization in favor of the United States. Even U.S. retaliatory tariffs on EU goods had a limited impact in Italy, where the government managed to lower their effects on the domestic food and beverage sector. And despite Trump’s hostile attitude toward NATO, Italy maintained its military engagements with the United States in Afghanistan, Iraq, and elsewhere. In all, Rome’s good standing with Washington gives it significant leverage to use toward improving transatlantic relations.
On matters of European defense, in particular, Italy has been more receptive than other EU states to the concerns of the United States. Washington’s decision to end its war in Afghanistan and its perceived snub of France reinvigorated talk of European strategic autonomy, broadly defined as the ability of Europe to defend itself and to intervene in theaters that have a direct bearing on European interests but that are not priorities for the United States. In Washington, this subject has raised questions about possible harm to the U.S. defense industry. Rome has an opportunity to bridge the differences between the two sides. Italy has strong connections with the U.S. defense industry—the country hosts the final assembly stages of the U.S. company Lockheed Martin’s F-35 aircraft, and Italy, the United States, and the United Kingdom are all working together to develop the Tempest fighter jet. Because of these ties, Italy generally takes a more conciliatory position than its peers when it comes to allowing third parties to join European defense projects. It is in Rome’s interest to prevent protectionism, spur technological development, and secure supply chains so that both the European and the American defense markets can succeed.
Close collaboration within Europe and across the Atlantic will be especially important for building a unified China policy. European countries have been converging on a tougher stance in response to Beijing’s uncooperative behavior during the COVID-19 pandemic and in recognition of the vulnerabilities of Western supply chains and technologies to Chinese influence. Just two years ago, Italy was widely criticized for its decision to sign a memorandum of understanding with China on the Belt and Road Initiative. But today, building on a shift that began in Prime Minister Giuseppe Conte’s second term, Rome is taking steps to distance itself from Beijing and establish clear boundaries between cooperation and competition. Draghi has publicly stated that Italy will reconsider its 2019 endorsement of the BRI. In April, he halted two contracts between Italian communications companies and the Chinese firms Huawei and ZTE. Together with the French government, Italy stopped a Chinese group’s acquisition of the industrial vehicle company Iveco. And out of concern about supply chain security, Draghi blocked the Chinese acquisition of LPE, a small company in Milan that specializes in the production of microchips. By aligning its policies with U.S. and broader European priorities, Italy has made its position clear in the emerging technology contest between China and the West.
Rome is more firmly distinguishing between practical cooperation and political agreement in other foreign policy arenas, too. Previous Italian governments blurred this line; the decision to sign onto the BRI, friction with France after Di Maio, then vice prime minister, met with leaders of the French gilets jaunes, or “yellow vests,” protest movement, and the League party’s Euroskepticism and implication in a Russian funding scandal all had Western allies questioning the course of Italy’s foreign policy. Draghi, however, seems to have righted the ship. Speaking at a press conference, the Italian leader described Turkish President Recep Tayyip Erdogan as a dictator even as he stressed the importance of cooperation with authoritarian powers on essential economic and security matters. Putting this idea into practice as a humanitarian catastrophe unfolded in Afghanistan following the Taliban’s takeover, Italy has repeatedly pushed for diplomatic discussions about a multilateral response to include China, Pakistan, and Russia. Draghi’s Italy remains willing to work with authoritarian governments—but it has also made clear to its Western allies where its boundaries lie.
Italy’s robust foreign policy and bold domestic reforms are a welcome change. Rome is even performing well in the fight against COVID-19 after being hit hard at the beginning of the pandemic: the government rolled out a successful vaccination drive and has pledged to donate 15 million vaccine doses by the end of this year. But, as usual in Italian politics, disclaimers apply. The current steady course is highly dependent on Draghi himself—and his ability to keep the ruling coalition together. Any upset to the balance, such as the election of a new president of the republic early next year, could trigger a collapse of the government.
More imminently, Italy is headed toward elections in 20 municipalities—including Milan, Naples, and Rome—in early October. The campaign is already reigniting the political quarrels that have been relatively quiet over the past few months. The far-right party Brothers of Italy, currently the only major party in the opposition, is polling at a solid 20 percent, followed by the nationalist League at 19 percent. Previously, some commentators argued that Draghi defeated right-wing and left-wing populism in Italy when he brought together a large coalition under a strong pro-EU and pro-United States banner. But the Brothers of Italy is poised to gain momentum. A possible new wave of migration to Europe following the collapse of the Afghan government will pressure the center-right—until now a cooperative participant in the ruling coalition—to adopt more hard-line positions. Meanwhile, Italy’s implementation of sensitive structural reforms could stir up discontent among one social group or another, allowing populist objections to EU authority to regain traction and reigniting the debate over the EU’s democratic deficit.
The Draghi effect may soon wane, given Italy’s traditional inclination toward swift political change. The experiment is holding for now, but the government will need to focus on designing sustainable economic reforms that can resist the pull of this historical turbulence. Draghi’s success will not just be to Italy’s benefit. If his economic reforms yield positive results, the Italian case can provide a road map for deeper European integration. And if Rome maintains its present foreign policy course, it can take the lead in mending transatlantic relations.