Southern Europe will pursue close relations with China
The EU will struggle to command support for its new China policy from member states in southern Europe
The European Commission published yesterday a position paper on EU-China relations in which it denounced Beijing as an ‘‘economic competitor’’ and ‘‘systematic rival’’. The document marks a sharpening in the EU’s position towards China. In the paper, the EU puts forward ten points designed to balance EU-China relations, including greater protection of European industries from Chinese investment. Southern European countries will treat the paper with caution as they look to preserve strong economic ties with China.
What next
EU leaders will discuss the paper at a European Council meeting on March 21-22. If approved, Brussels will ask Beijing to agree to market access barrier proposals, particularly concerning technology, by summer 2020.
Subsidiary Impacts
- The EU and United States will find more common ground on their policies towards China once President Donald Trump has left office.
- European governments will become more interventionist on international mergers of ‘national champion’ firms.
- UK crackdown on Chinese technology will inhibit prospects of a future UK-China free trade agreement.
Analysis
The EU presents itself as being one of the most open regions for foreign investment. According to UNCTAD's World Investment Review, total stocks of foreign investment in the EU as of end-2017 stood at 9.1 trillion dollars compared with 7.8 trillion dollars for the United States and 3.4 trillion dollars for China. However, the EU is assessing ways to protect European markets where foreign investment poses a risk to national security.
New regulation
On February 14 the EU created a legal framework to screen outside investment, marking the first real attempt to create a framework to curb the scale and nature of foreign investment. The proposals aim to reduce risks to ''critical infrastructure'' (energy, transport, communications, data, financial services) and ''critical technologies" (robotics, artificial intelligence), and were initially led by Germany, France and the previous Italian government.
Within the framework, which will come into force in April, member states are required to notify one another and the Commission of any outside investment perceived as 'political' and provide information on investments upon request either from other member states or from the Commission. The Commission can also conduct its own review of the investment and offer advice to governments.
Although the intention is not explicitly mentioned, the framework is designed to curb China's influence in European economies. China has invested almost 150 billion euros (170 billion dollars) in Europe since 2010, but the EU shares US concerns about the nature of some Chinese business activities and hopes that the new framework will provide a strategy for making Beijing's economic ambitions more transparent.
While the EU can make recommendations, decisions to block foreign investments will remain the sole responsibility of member states. Although this is understandable -- given the backlash the EU could face if it interfered in a country's investment -- separate political and economic concerns among EU members will determine the extent to which they curb foreign investment.
Only member states will be able to block foreign investment
Moreover, the EU's plans will expose division in the continent. Southern European countries such as Portugal, Spain, Italy and Greece are concerned that the investment screening could act as a form of protectionism and slow Chinese investment into their countries. In 2018, southern Europe received more investment from China than either the United States or the rest of Europe received.
Italy
Italy's former centre-left government under Matteo Renzi was a very close policy ally of Germany and France, while it sought to restrict Chinese investment in Italian infrastructure. However, over the last year Italy has significantly shifted its policy vis-a-vis China.
Italy's populist government sees Chinese investment as an economic opportunity and is considering becoming the first G7 country to officially endorse China's Belt and Road Initiative (BRI) in order to boost bilateral trade with China. It particularly wants to make 'Made in Italy' products more accessible on the Chinese market.
Chinese President Xi Jinping will travel to Rome on March 22 for talks with Italian Prime Minister Giuseppe Conte. A joint memorandum is planned to show both parties' commitment to closer relations. Over the past decade no European country has received more investment from China than Italy. Endorsing the BRI would represent political defiance of EU attempts to establish a coherent and unified policy towards Beijing.
Although Italy wants to boost trading relations with China, intra-government conflict could jeopardise closer political relations. Italy's interior minister, the far-right League party leader Matteo Salvini, endorsed the notion of Italian companies increasing overseas investment, but rejected the prospect of foreign companies coming to ''colonise'' Italy.
Italy's government appears divided over endorsing China's BRI
He also suggested that he is concerned about Huawei's role in telecom networks in Italy, which contradicts Deputy Interior Minister Luigi di Maio, who said the government had no security concerns regarding Huawei. Although Conte is expected to sign a memorandum of understanding, details of Italy's cooperation in the BRI could provoke division in the government over the coming months.
Portugal
Xi's visit to Italy comes three-and-a-half months after he visited Portugal and Spain. Unlike Italy, both Portugal and Spain have pro-EU governments.
However, when it comes to creating a protective industrial strategy and French-German plans to create mergers of 'European champion' firms to combat Chinese influence, Portugal finds itself at the other side of the fence (see EU: Competition policy faces opposition - January 29, 2019).
Since 2004 both Beijing and Lisbon have been engaged in a 'strategic partnership' which has attracted inward investment of over 12 billion euros, in areas such as energy, transport and financial services. Today, the China Three Gorges Corporation and China Ningbo International Corporation own a 28% stake in Portugal's state owned utility firm EDP-Energias de Portugal SA.
Chinese investment is especially relevant to countries such as Portugal as it purchased state-owned assets that the Portuguese government was forced to sell during its 2008-13 financial crisis. Those included government bonds, which no other investors were willing to purchase.
Chinese investment in Portugal was crucial for its post-recession recovery
During Xi's visit to Portugal in December, he described Portugal as strategically important for the BRI and signed a memorandum of understanding regarding cooperation in the BRI on issues such as digital connectivity and electric mobility.
Despite the EU's efforts to curb Chinese investment into Europe, Portuguese Prime Minister Antonio Costa shows no signs of altering his policy. Although he recognises it is important to screen third-country investment, he suggested that the EU was engaged in a ''protectionist'' agenda, also arguing that Portugal's "experience with Chinese investment is very positive".
Outlook
Southern Europe's engagement with China comes at a time of growing policy fragmentation in the EU as well as a slowing growth in the euro-area (see EU: Euro-area will see modest growth - February 15, 2019). In addition, Germany and France will become relatively more powerful in the post-Brexit EU adding to concerns that they will create protectionist industrial policies to crack down on non-EU investment. The combination of these concerns will ensure some countries will continue to look to China as an economic ally.
