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In the following article Italy’s populists turn to Trump and China it appears that Italian government is now seeking new alliances outside Europe to finance its debt, given that the ECB is coming to an end with its QE programme.

Both the USA and China appear to be well disposed to help Italy to refinance its debt in the future, but what could the collateral cost of this move be to the EU.

Given the existing high tensions between Italy and other EU countries on issues such as immigration, if Italy has to count on Americans and Chinese to finance its huge debt, could this kind of new financial alliances pose a real threat to the unity of the EU?

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    The USA makes Italy's debt look tiny. Trump doesn't have the means to back up his words, and I doubt Congress will tolerate it. – MSalters Sep 11 '18 at 12:36
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The problem the EU faces is that they have a linked monetary policy, but lack the controls over individual countries to keep them from collapsing it. Italy taking on debt from China/U.S. isn't a bad thing so long as they can make the payments. The issue comes when an EU country has to default on its debt, which could be a disaster for the euro. The advantage to having most of a countries debt being owed to ECB/other EU banks is that the EU has more power in negotiating favorable terms to prevent defaulting. The U.S. and China are much less likely to be as forgiving, and they may use their share of debt to force the EU into other less favorable terms to prevent total collapse of the Euro.

The danger of debt is not being able to pay it, and when that happens you don't want to owe a loan shark. The real danger to the EU is them not being able to spur growth in their lagging member countries. Italy seeking debt from abroad is a symptom of EU policy not creating enough growth in economically weaker countries.

  • I agree with the points you make, my question is more on the possible implications that a higher financial dependence of Italy from USA and/or China might generate. I don’t think that they would mind seeing a breakup of the EU. – user070221 Sep 11 '18 at 17:30
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    Actually, that's completely backwards. The EU has many means to pressure countries into not defaulting and generally following a restrictive fiscal policy, even when it is clearly not to the country's advantage. For all the talk about spendthrift Southerners failing to live up to German standards or deficits being slightly above the threshold set in the convergence criteria, all Eurozone countries have implemented pro-cyclical austerity policies during the last crisis. – Relaxed Sep 11 '18 at 21:50
  • The clearest example of this is Greece. Once it had a primary budget surplus (mid 2015), it could have easily defaulted. A government outside the Eurozone could have defaulted earlier and Chinese or US creditors (public or private) could not have done much about it (how could they “use their share of the debt” to prevent that and how would that make the euro collapse?). By contrast, the ECB was able to force Greece to inflict further austerity because the country was not prepared to break with the EU. The EU hasn't been forgiving at all in this whole story. – Relaxed Sep 11 '18 at 21:51
  • The real danger (and the reason the EU stepped in in Greece originally) is that private European banks were heavily exposed to Greek sovereign debt and a default or haircut could have prompted a financial crisis. Foreign debt would have made the issue less, not more, pressing for other EU governments. – Relaxed Sep 11 '18 at 21:53
  • @Relaxed in the Greek case more foreign debt could have forced a default if they weren't able to renegotiate with foreign parties. An EU member country defaulting on debt is in undefined territory. About the only consensus is that it would be extremely damaging to the Euro as a currency which would create a far more widespread crisis than banks having to take a loss. – Ryathal Sep 12 '18 at 11:53
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To delve into a piece of Ryathal's great answer, the implications of a higher financial dependence of Italy on an outside benefactor can be seen in history, though not necessarily from the perspective of breaking up the EU.

China's Belt and Road Initiative has drawn a lot of ire from the international community in the sense that China is giving poorer countries huge loans to make huge infrastructure projects, often with the cost/benefit analysis of the cost of the loan to the benefit of the project being overly optimistic at best, and highly corrupt at worst. The fear is that these countries will be left with debt to China they cannot repay, and China can then name their terms for repayment of the debt, which could include anti-EU moves, which could be beneficial to China (not necessarily so in either case).

This has been seen before in history. The US engaged in this same sort of neocolonialism during the cold-war era, an excellent read on the topic is Confessions of an Economic Hitman. Though the legitimacy of some claims in the book are dubious, the principle is the same. Tell a country their GDP will increase by X% in Y years given [black box equation] if they let a US company (or in the current case, a Chinese state company) build a giant airport/power plant/highway - or just bribe the decision makers to let them do so. Then once the project goes overbudget and/or the return doesn't cover the investment, the crediting country says "give us better access to your X/buy more of our Y or we'll start calling your debts". It is easy to see how this could strain the EU if Italy was beholden to China in this way, should China decide that attempting to fracture the EU in this way was to its benefit.

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