Italy-EU Budget Crisis: Will Russia Help the Italian Economy?

Italian Prime Minister Giuseppe Conte travelled to Russia on an official visit on October 24, 2018. During his talks with President Putin, much of the discussion revolved around global policy issues both in the context of the Italian OSCE chairmanship and the conflicts in Syria, Libya and elsewhere. In particular, Russia supported Italy’s efforts to hold an international conference on Libya in Palermo in mid-November. Politically, this summit passed with minimal criticism of Russia, at least in public settings (during the news conference and in statements). On the contrary, the Italian prime minister spoke of Russia’s return to the G7 or G8 format, said that the sanctions would have to be “left behind” and the sooner the better, and that relations between Italy and Russia will continue to be strong and self-sufficient regardless of the external environment, as always. The idea of Italy as the protagonist of Russia's return to cooperation with the West received additional support during this summit. The Italian prime minister invited the Russian president to pay a return visit to Italy, making a point of mentioning that he “had not been there of late.”

In addition to the political agenda, Vladimir Putin and Giuseppe Conte held a large meeting with representatives of the Italian business community where it was noted that bilateral trade has been growing for two years now, which creates a basis for reaching the pre-crisis level of trade (the 2013 high). Russia is Italy’s fifth largest trading partner. Italian investment in the Russian manufacturing sector remains intact. The Italian prime minister publicly emphasized that, unlike others countries, Italian companies of all sizes had a large presence in Russia during the post-Soviet period and they did not leave Russia en masse after the onset of the political crisis in Russia-EU relations. As a result, Russia is still seen as a partner open to industrial and investment projects under the Made with Italy program, which has become a foundation for promoting Italy’s industrial policy abroad. During the meeting, there was actually a video conference with the opening ceremony for a new plant producing high-voltage electrical generators, built in cooperation with the Italians in Chelyabinsk.

The summit participants also noted the traditionally high level of cultural and humanitarian ties between the two countries. A new Russian-Italian film Sin about the life of Michelangelo directed by Andrei Konchalovsky was screened for Vladimir Putin and Giuseppe Conte. Importantly, the Russian president publicly thanked the mayor of Rome for helping Russian football fans involved in the recent escalator crash in the Roman metro, heading off the possibility of an anti-Italian campaign in the Russian media.

However, as important as these matters are, the most exciting and intriguing aspect of the summit was something completely different. In addition to global politics and Italian investment in Russia, special focus was on whether Russia will get involved in addressing the problems associated with the Italian public debt. At a news conference, Vladimir Putin and Giuseppe Conte were asked if Russia would begin a massive buy-up of Italian government bonds. Publicly, both leaders denied such a possibility stressing that it was not discussed during the talks. The Italian prime minister emphasized that he did not come to Russia for money. However, Vladimir Putin noted that Russia has no doubts about the reliability of Italy’s financial instruments, and if the Central Bank and the Russian National Wealth Fund decide to invest in Italian bonds as part of a program to build up Russia’s foreign reserves, “there will be no political restrictions to do so whatsoever."

The overall impression created by all the details both leaders provided at the news conference was that the real answer to this question may be “no, but…” Thus, a whole new area of cooperation between Russia and Italy could open up, changing the complexion of the recently aggravated budgetary and financial disagreements between Italy and the EU.

More recently, Brussels objected to the high deficits of the proposed Italian budget. This led to a rather sharp disagreement over the program announced by the new Italian government to transition to a policy of financial easing to boost the economy. The media reacted to these events with a flurry of criticism and debates not only in Italy, but around the world as well. For example, the conservative US channel Fox News bluntly stated that this conflict could actually start the process of Italy’s withdrawal from the European Union. To dispel any doubt, the leader of the UK Independence Party Nigel Farage reiterated on Fox that the EU and democratic states are incompatible.

Public opinion was also roused in Italy itself. This weekend, the leaders of the two partner parties in the ruling coalition, the League and the Five Star Movement, deputy prime ministers Matteo Salvini and Luigi Di Maio, respectively, held a special meeting to discuss a new government financial ploy. A reassuring phrase was floated that “no bank will be affected.” From a media perspective, it is clear that if the government is suddenly making a statement of this kind, the risk of such a negative development is in fact quite high. The likelihood of the stability of the Italian financial system being undermined as a result as was the case in Greece or Cyprus due to restrictive EU measures cannot be ruled out.

It should be noted that the EU pressure on Italy to toughen its austerity policy has been continuous over the past decade. In addition to political disagreements, it was Brussels' discontent with Silvio Berlusconi’s financial policy ---which was generally aimed at supporting the real economy amid rising prices following the transition from the lira to the euro – that led to a behind-the-scenes campaign in the EU to get him to resign. Having achieved that in late 2011, the new fully pro-Brussels Italian government led by former European Commissioner Mario Monti began to actively pursue a policy of austerity. This policy was continued by the next government headed by Matteo Renzi. Of course, this led to a reduction in social spending in the budget and an increase in protest sentiment among citizens. As a result, the Renzi party lost the parliamentary elections in Italy in the spring of 2018. The new coalition of the League and the Five Star Movement that came to power announced a change in course, but ran into stiff opposition from Brussels.

Clearly and quite logically, given these circumstances, Italy is objectively interested in financial support from outside the EU. This could mean greater involvement in the Italian debt market by the United States (support for EU "dissidents" would align with Trump’s strategic goals) and China (as part of its larger strategy to gain financial influence in the EU) and, yes, Russia, as well. If that happens, it would be nice if this purely economic transaction (quite beneficial for us in the context of gaining access to new markets and symbolizing an end to the notorious “toxicity” in relations between Russia and Western countries) is not accompanied by a media campaign in Russia setting high political expectations for Italy and doesn’t lead to outsize pressure on Italy regarding lifting of sanctions, etc. This is precisely how we “scared off” Greek Prime Minister Alexis Tsipras several years ago, and the dialogue between Russia and Greece, which was planned in the first months of his premiership, was scaled down. In view of the long tradition of constructive bilateral relations between our countries, the old proverb ‘a friend in need is a friend indeed’ seems most apt.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.