Italy Considers China's Belt & Road, with Giulio Pugliese

Podcast music: Blindhead and Mick Lexington.

DEVIN STEWART: Hi, I'm Devin Stewart here at Carnegie Council in New York City. I'm here with Giulio Pugliese. He is a visiting scholar at the Reischauer Center at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, DC.

Giulio, thanks for coming by. We've interviewed you before over the phone. I'm glad to see you in person.

GIULIO PUGLIESE: Thanks for having me, Devin. It's a real privilege.

DEVIN STEWART: We're both people who have some connection with SAIS and the Reischauer Center and Professor Kent Calder, so we have a lot of friends in common.

GIULIO PUGLIESE: We're part of the same mafia, yes.

DEVIN STEWART: SAIS mafia.

GIULIO PUGLIESE: As an Italian I should specify the SAIS mafia.

DEVIN STEWART: And connections to the Bologna Center in Italy, of course, the lovely Bologna Center.

Also, I have a little announcement that the Asia Dialogues program here at Carnegie Council is going through a transition, the end of a phase. We're going to start a new chapter. I'm basically winding down a lot of my programs as a program director at Carnegie Council, and I will go off and be leading up some research projects over the next several months focusing on China and the Belt and Road Initiative (BRI), which is the topic of today's podcast.

For the listeners, please keep in touch. I'm on Twitter, @DevinTStewart, and I look forward to keeping in touch. We'll have at least one more Asia Dialogues podcast by the end of the summer. The next one is with James Farrer, who is a professor at Sophia University in Tokyo.

Giulio, everyone's looking at Italy these days. In politics it has become interesting again, which is always dangerous.

GIULIO PUGLIESE: It's a worldwide trend, I am afraid.

DEVIN STEWART: Politics is where the money is, so to speak. It's where the action is all around the world.

Can you give us a sense of an Italian's perspective on what is going on with Italian politics? I suppose the general perception is that there is a rise of populism, but it's not necessarily really right-wing or really left-wing; it's sort of an ambiguous populism. At least, that's how the English press portrays it. How would you portray what's going on in Italy politically today?

GIULIO PUGLIESE: I think I would say that this is really a government that is expressing a deep dissatisfaction with the status quo, in rising economic inequality, and the so-called "one percent" or the Establishment. In a sense, you are seeing similar motifs playing up in the rest of the world, from the United States to Brexit Britain to Italy, and paradoxically even in China. You are seeing a mass discontent toward what are perceived as corrupt politicians and rising economic inequalities.

I think this has brought back—and the advent also has coincided with the comeback of —charismatic leadership, so you see more and more populists that are communicating directly with the electorate. This is fascinating because Italy has been at the forefront of political modernity, and this is a very interesting anecdote that I'd like to expand on. It's just that it has been at the forefront of dystopic political modernity. We have exported fascism. We were the first to coin fascism. Then of course we exported Berlusconi. You have it right here in the United States of America.

DEVIN STEWART: You guys are taking credit for that, too?

GIULIO PUGLIESE: Of course.

DEVIN STEWART: You take lots of credit.

GIULIO PUGLIESE: Unfortunately, it's bad credit that we deserve.

There is a third stage, which is Internet-based populism. One of the two parties in government, part of the coalition government, is the Five Star Movement, which was born we shouldn't forget from a disgruntled very famous standup comedian who started up an activist blog, and this snowballed into a movement and into a political party that now dominates the Italian Parliament together with another you might call populist, more right-leaning party, which is the Northern League Party, which has traditionally been in favor of federalism within Italy and protection of the interests of Northern Italy.

Their leader is particularly media-savvy, and when he visited the United States recently, you should look at his Twitter account and play close attention to all the videos and the way he portrayed his almost rise to stardom. In the past two weeks I think this happened. He was able to really communicate with the electorate through Twitter. What we're seeing here is a third face of politics, and again Italy is at the forefront, which is Internet-based populism.

The current government has capitalized on the broad dissatisfaction against austerity measures within the eurozone, which if you read Stiglitz or all sorts of neo-Keynesian economists, you'll expect austerity measures have further crippled the Italian economy.

DEVIN STEWART: So it's a rejection of the elite, it's a rejection of what else? Is it a rejection of liberalism, too?

GIULIO PUGLIESE: No. It would be more of a rejection of—

DEVIN STEWART: Corruption?

GIULIO PUGLIESE: What is understood, and this is something that we need to understand with populist discourse worldwide, is it's a rejection of the embedded—this is the narrative—tyranny, if you want, of supranational organizations such as, for instance, the European Central Bank—

DEVIN STEWART: Globalism.

GIULIO PUGLIESE: Yes. But in Europe this has taken shape around the European institutions. European populist movements, especially in Italy and France, go by the name of "sovereignist" movements, so they want to take back control. This is Brexit Britain talk.

DEVIN STEWART: That's like nationalism.

GIULIO PUGLIESE: Absolutely.

DEVIN STEWART: It's celebrating the nation-state as the primary actor in the world and returning to a sense of national identity.

GIULIO PUGLIESE: Yes.

DEVIN STEWART: On the surface, those things can be healthy, but what do you make of those trends? Are you generally concerned, or do you generally think it's neutral? Are you happy about it?

GIULIO PUGLIESE: I think we are experiencing a movement of turbulence. I would go back to the earlier point, that is, that populist movements within Europe are really trying to gain back control, so to speak, because there is a perception that there has been a lack of democratic accountability, and with some merit. We need to give credit when we talk about—

DEVIN STEWART: Isn't that a reasonable claim given that Brussels seems far away and sort of out of touch from the common person, say, in Italy or Belgium or France?

GIULIO PUGLIESE: It is. To the extent that, for instance, when we celebrated the ouster of Berlusconi, we shouldn't forget that really what we got was a technocratic government that was there to implement strong austerity measures and structural reforms that were in line with the desires of the so-called "troika" of the International Monetary Fund (IMF), the European Central Bank, and the European Commission, not least to gain credibility with the markets and to reassure the markets. Markets have this kind of undemocratic force, financial markets, on politics everywhere in Europe.

So, we need to really understand, we need to put ourselves in the shoes of the populists to understand that when we liberals—and I claim myself to be a strong believer in the European Union and in liberal democracies—that there has been a lack of democratic accountability, and incredibly mindless and continued austerity measures can really backfire and actually trigger on the opposite side, the rise of nationalism and populism. So, we need to be careful and strike a balance.

DEVIN STEWART: Is it helpful to describe these populist movements in Europe as right-wing or left-wing, or is that confusing? Does that just confuse the issue?

GIULIO PUGLIESE: I think what we're experiencing is a mishmash of different tensions. The traditional one you could say is the one between a globalized and cosmopolitan and outward-looking rich components of national economies, and the other one is the one from lower and middle classes that have been left astray by the tides of globalization. The socioeconomic divide has been rising, has been effectively caused by very strong globalization tides in the 1990s and 2000s.

On top of that, of course, as the economic performance of different developed countries stutters, you're going to get blame given to immigrants, given to "others," so to speak, given to Europe, and given to China in some cases, with some reason. But this is a way to beat the nationalistic drums and gain consensus.

This is typical populism, but I wouldn't say that it's necessarily left or right. If transcends left or right to the extent that the Five Star Movement is a composite beast. It's made up of people who have right-wing views, of people who have centrist views, and people from the street who have if you want rather liberal center-leftist if not even leftist views. It's a three-, four-headed beast. This is a perfect example of the composite nature of populists nowadays.

That said, I would like to add something. I think that what we are going to experience is that this is probably not going to be sustainable. Let me do some forecasting, if you want. The rise of Trump, of Brexit Britain, and really the pain that Trump will inflict, for instance, with his mindless tariff war against friends and foes alike or even the mindless decision to go for Brexit, I think the European Union will use these examples as negative examples, both Trump and Brexit, to scare off supporters of the likes of Marine Le Pen, Salvini, and whatnot. I would still say that absent a major financial crisis—fingers crossed—

DEVIN STEWART: Scare off how, with rhetoric or with threats?

GIULIO PUGLIESE: Effectively by showing how Brexit Britain is mired with failure. Already we are seeing—

DEVIN STEWART: So, the European Union, you're saying—you're kind of implying that the European Union has an interest in showing that Brexit is a failure.

GIULIO PUGLIESE: Absolutely. Of course.

DEVIN STEWART: Isn't that playing with fire? Couldn't there be a backlash? I know there are some people in Europe who are unhappy with the leadership in the European Union about their treatment of Great Britain.

GIULIO PUGLIESE: I think there has been unity within the European Union to the extent that there is a willingness to make no discounts to Britain in terms of the debt it owes to the European agencies and also the fact that effectively, since we are going to renegotiate possibly even trade deals, we have more leverage, and so there is an economic interest as well in making sure that Brexit is effectively managed with a degree of order. But I am pretty sure that the underlying thinking in France and Germany, which are the leading European Union countries, is to make what the Japanese call a homing kyoshi [phonetic] out of Brexit, which is a negative example, a negative teacher, so to speak, out of Brexit.

DEVIN STEWART: It seems very risky.

We should get to one of the issues at hand today, which is what some people are calling Italy's "dance" or Italy's "waltz" with China in China's overseas investments and specifically China's Belt and Road Initiative, which is possibly a multitrillion dollar infrastructure project across the Eurasian continent.

Before we get to the situation, I'm curious because you've written about this in the South China Morning Post. I don't know if you got into this in that article, but given what we just talked about, which is the rise of populism, you said there are similarities in Italy and in China in terms of disturbances, disruption from globalization, and unhappiness about the elite, corrupt bureaucracy, and so forth.

GIULIO PUGLIESE: By all means.

DEVIN STEWART: I'm curious whether Italy's own experience with National Socialism, for example—

GIULIO PUGLIESE: Fascism, I beg your pardon.

DEVIN STEWART: Okay. We can call it that. You're right. But Italy does have experience with National Socialism as well. You could also call it fascism, but anyway we don't have to define our terms here.

But I'm curious whether Italy's new openness to work with China, does that have something to do with maybe a political affinity, where things are going?

GIULIO PUGLIESE: Oh, gosh, no. Oh, my god.

DEVIN STEWART: So there's no element of "We can work with these guys because we're becoming a little bit more populist, and we can see eye to eye with the Chinese Communist Party?"

GIULIO PUGLIESE: No, no, no.

DEVIN STEWART: What's driving it, then?

GIULIO PUGLIESE: I think we should take a step backward and re-qualify, really—which is what I did with that editorial—Italy's engagement with China, which has been sustained and has been pretty much in line with the engagement of other European economies, including the major ones—Germany, France, Britain—to the extent that Italy has tried to strike a balance between welcoming political signals, for instance, by sending the prime minister to the first Belt and Road Forum in 2017, if I'm not mistaken, and at the same time by teaming up with Germany and France in the same year to initiate a new foreign investment screening mechanism within the European Union, and this was aimed at China.

This government has had tense relationships with the Northern players of the European Union and the big countries such as Germany and France within the financial economic congress where government budgets are de facto validated. Italy went for a game of chicken, but it lost. It wanted to spend more and do more government deficits, government spending, than it was allowed.

DEVIN STEWART: This was part of the Maastricht Treaty.

GIULIO PUGLIESE: Exactly. This was part of the Maastricht Treaty and then eventually of the so-called "fiscal compact," but further embedded really even in the Italian constitution, fiscal austerity constraints so that Italy's public debt wouldn't grow effectively.

DEVIN STEWART: Right. And that's imposed by the European Union.

GIULIO PUGLIESE: And it's imposed by the European Union.

So there was a game of chicken that Italy lost, and this populist government wanted to find new players to gain leverage vis-à-vis the European Union. These players, by the way, are not just China, but it's also the United States of America with Trump, and that's the reason why we are seeing Salvini coming to the United States two weeks ago claiming that there is no closer European player than Italy.

DEVIN STEWART: I don't want to argue too much about this, but it just strikes me that it's interesting that this new political environment in Italy is partly to do with a rejection of international organizations and globalism and regionalism and the European Union itself—there's partly a dissatisfaction with bureaucrats, the "Eurocrats," so to speak—and just when that has happened now Italy is looking for basically new options that are non-EU options.

It does seem like maybe political viewpoints are playing a role in Italy's new direction, or am I reading too much into that?

GIULIO PUGLIESE: I think we're reading too much into that to the extent that Italy's foreign policy is still strongly embedded in the trans-Atlantic alliance and in the European Union general positions. But there is a strain.

DEVIN STEWART: Trump is not a famous liberal, for example.

GIULIO PUGLIESE: I absolutely agree. The problem is that there is a lot of signaling, but he tries to effectively extract concessions and play those signals both for the electorate back home to show that Italian populists are doing something by teaming up with Trump or back in the day even with Bannon. That signaling is really empty. If you look carefully at the real outputs of Italian foreign policy, you wouldn't notice, for instance, an Italy-China Memorandum of Understanding (MOU) that is revolutionary. If you read the fine print of the Memorandum, which has been leaked also before it's signature—

DEVIN STEWART: There are 29 MOUs.

GIULIO PUGLIESE: There are 29 MOUs, but there is a framework MOU which is the one which defines what people would call Italy kowtowing to Xi Jinping's grandiose vanity project. But if you read the fine print, Italy's MOU is the first that mentions expressly European Union initiatives, and it's the first that wants to collaborate with the only multilateral policy bank that is connected with the BRI, which is the Asian Infrastructure Investment Bank.

DEVIN STEWART: The AIIB.

GIULIO PUGLIESE: This is very different from the more rapacious and extortionist side of the BRI, which is usually going through its murkier policy banks, like China's Development Bank, which we don't know anything about in terms of transparency, in terms of how many projects they fund. The AIIB is widely regarded, even by financial rating institutions, as a multilateral bank. You could say that the very limited scope of the AIIB is indicative that the BRI MOU is more symbolic, the one signed with Italy, is more of a political symbol that Xi Jinping needed to sell to his own people to drive away the international and domestic backlash to his own pet project.

DEVIN STEWART: The BRI. You're saying essentially that Xi Jinping is adapting to international criticism, and this is a good case of where China is pivoting and improving the BRI perhaps.

GIULIO PUGLIESE: Yes.

DEVIN STEWART: Okay. That's very interesting. What is Italy getting? What are some concrete things?

GIULIO PUGLIESE: That's a good question. I think what Italy has been trying to do—this is my suspicion—with its cozying up to both Trump and eventually also to China with this Memorandum of Understanding, again with symbolic initiatives more than anything else, is to play that leverage against the European Union to feel less isolated internationally, but also at the same time to extract economic benefits such as, for instance, the selling of government bonds. We don't really know because this is naturally not open. We don't know how many Italian-produced government bonds have been sold to this or that country, and I suspect that there has been that particular interest.

I also suspect that the BRI MOU has been really aimed at cozying up to Beijing only symbolically with just a massive reception for Xi Jinping. For instance, I can tell you this: I've learned that the Italian government started using again chariots only for welcoming Xi Jinping to Italy to greet the Italian president of a republic 40 years after it had last used chariots with horses. You know why that is the case? To basically prop up the grandiose image of Xi Jinping coming to this old G7 country with a very long history which is at the end of a long Silk Road and effectively so that Xi Jinping could play back those images to his own constituencies back in China because China is an autocracy, but of course the sort of like personality cult that Xi Jinping has built around himself rests also on these powerful images.

The tradeoff then would be that Italy would gain recognition from China that it has been the first G7 country, the first mature economy, developed country, to really endorse this grandiose project, and this might play well—this is my analysis—in the context of mounting U.S.-China trade frictions. For instance, with raising tariffs, a less relaxed atmosphere within the United States of America and China, you would see, for instance, fewer tourists. Where might those Chinese tourists go or students go instead of the United States? They might go to the United Kingdom or they might go to Italy. Tourists might go to Italy.

Never discount also the power of Chinese propaganda to the extent that by wanting to drive a wedge or more simply to divert tourism from going to the United States and to go somewhere else we might actually benefit from these trends at the tactical level. This is Machiavellian, if you want, but it is not by chance that Italy has launched a campaign of Italian tourism in China for 2020. I think the timing is actually perfect because, hear me out—and this is the key to understanding Italy's position—we have given away nothing but a symbol, chariots and horses, to Xi Jinping so that he can play this up to his own constituencies, but if you read the fine print it's all around EU lines, and it's all very constructive and amounts to nothing but symbols, the BRI MOU.

It's not Italy becoming Pakistan or we are getting laid with debt trap problems. We are not at that level. We are not even at Greece's level, not least because ports are public, and we have still a lot of assets. But, at the same time, we might benefit from it, especially given the current tensions between the United States and China.

But, that said, Italy has been very constructive also within the European Union. There are initiatives—and this is important to state—that are calling out China not just as a potential collaborator in issues such as climate change or Iran but also as a strategic rival and as an economic competitor. This is a new trend in the European Union.

Italy is agreeing on all of the agenda if not most of it. This government has abstained on the new screening mechanism for foreign investments, but it didn't play hardball going against it; it abstained—for a variety of reasons that I'm not going to touch upon—like Great Britain did.

So, I think we are going to see Italy pushing forward for the France-German agenda in favor also of building big industrial champions, which is a way to compete with the big national champions that are of course the byproduct of distorted market practices in China and also new procurement initiatives that France and Germany have launched.

And lest we forget, Italy's public opinion is the wariest of China in Western Europe.

DEVIN STEWART: Why is that the case?

GIULIO PUGLIESE: I think for a variety of reasons. We were the first country to be protectionist vis-à-vis China when in the early 2000s our textile industry was facing incredible competition from cheap garments and whatnot from China. We were told by our Northern friends within Europe, "Well, it's the 21st century. Evolve. It's capitalism, so you really need to beef up your industries and evolve in the face of foreign competition and globalization."

Well, here we are where the rules have effectively reversed to some extent, where Italy would perhaps benefit from developing a couple of Northern ports, not the port itself, but logistical facilities thanks also to Chinese capital. This is understood with incredible wariness from Northern European states.

DEVIN STEWART: How so? Why are they wary?

GIULIO PUGLIESE: I think the suspicion is that this government will kowtow too much to Chinese political requests in order to extract investments.

Again, we need to understand that the nature of these investments is limited, and it's not going to affect the ports themselves. These remain public. It's going to affect, for instance, in Trieste's case, a logistical facility that will process Chinese goods to go to rich Western economies which are very close to Trieste, much closer than, for instance, the Piraeus port, which is rapidly becoming the number-one port in the Mediterranean. The Chinese government, the Chinese state-owned enterprise with Piraeus has shown that it has been particularly effective there.

We need to recognize that Chinese capital is part not just of Southern European ports but also the port of Rotterdam, for instance. It has a considerable amount and percentage of that port.

So, I think we need to be very careful to distinguish symbols. Italy has been particularly good at throwing around smoke. If you look at football, we have effectively very good players, not least in their acting skills.

DEVIN STEWART: Very dramatic.

GIULIO PUGLIESE: Very dramatic, of course. So, I guess this applies to politics as well.

DEVIN STEWART: Absolutely. We should wrap up soon, Giulio. I've taken a lot of your time. But I have a couple of concluding questions.

Given the natural wariness in Italy of China in the recent past, what types of concerns do Italians have about doing business with China in the context of the Belt and Road Initiative? So, number one, what are the concerns? Number two, are those concerns legitimate? And finally, do you have any recommendations for countries that are doing this type of cooperation with China going forward?

GIULIO PUGLIESE: I think the concerns that the Italian population, public opinion, holds toward China have already been taken into account with the wholly symbolic nature of this framework MOU between Italy and China, which lacks substance, in my opinion. There is a degree of suspicion toward China's power and toward the fact that that power can be wielded for authoritarian purposes and really for the benefit of its own parochial national interest, which doesn't necessarily in fact coincide with ours, not least because the Italian population sees pretty clearly the divide between our democratic model and a Leninist party-state system.

I suspect that we will keep the MOU with China, which is a good thing in my opinion, precisely because it's symbolic. We will have to wait for the BRI to get a new meaning. I think that's the trick.

The Belt and Road Initiative is everything and nothing. This is the beauty about politics nowadays. Again, we are talking about symbols. If you want the common thread of today's talk, it's a global Rorschach test. To some—such as the U.S. government, if I may, the current one—it's evil Xi Jinping with his white cat bent on world domination. To others, such as Southeast Asian countries and development economies it is a welcome addition to government financing from other countries such as Japan or even European countries.

DEVIN STEWART: It's both and neither.

GIULIO PUGLIESE: Exactly, and it can evolve. That's the trick. This is the difference I see between the European Union writ large and the United States approach. I think the United States approach, especially with this administration, has a zero-sum take toward China, which is solely understood as debt trap diplomacy.

We need to be careful because the trans-Atlantic alliance can have a bit of a strain because I see that European Union countries—including France and Germany, which are even more suspicious than Italy toward the Belt and Road Initiative—haven't posed a veto on collaborating with Belt and Road, and even Japan hasn't posed a veto, and Japan perhaps has a lot of heightened threat perceptions vis-à-vis China. So, we need to be careful about really understanding perhaps how to change the Belt and Road.

If it's true—and I see an evolution—that the Belt and Road is evolving in some way because of pushback not just internationally but also domestically—the Chinese are very unhappy that China is on this spending spree that doesn't necessarily have returns on investment, and in fact debt trap can well apply to China's own debt resulting from the Belt and Road—then the trick perhaps is to play it up in a constructive way that leads to better government financing practice from the Chinese vantage point that abides then to international standards such as sustainability, openness, transparency and, interestingly enough—to close it with recent news—at the G20 China has agreed to Japan's agenda in favor of quality infrastructure and raising the standards in government financing.

We need of course to always double-check whether these rhetorical promises and statements translate into effective change, but I do see an evolution. Perhaps that very evolution was one of the cynical reasons for the Italian government to actually subscribe to the Belt and Road along international standards. If you read the framework Memorandum of Understanding, it's extremely constructive. It almost looks as if Italy had changed China's Belt and Road practice, which was not the case, of course. It was already changing. I think we joined on the bandwagon, and I would expect more countries to join the Belt and Road bandwagon.

I think that the U.S. government might find itself actually—this is my concluding remark—in a minority position, pretty much like the AIIB in 2015, when everybody basically effectively joined the AIIB and made it a multilateral bank. If my sense is correct, I think this is going to happen with the Belt and Road as well.

DEVIN STEWART: Seems like a reasonable prediction, Giulio. Thank you.

Where can people find you on social media?

GIULIO PUGLIESE: I think you can Google "Giulio Pugliese War Studies," because that's the department I belong to at King's College London normally. I'm a lecturer there; @PugliesAsia is my Twitter handle. I guess that the easiest thing is to just Google "war studies" and "Pugliese" or "Giulio" and you'll find me online.

Thank you very much.

DEVIN STEWART: Thanks again, Giulio.