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Good morning! In today’s newsletter, our Rome bureau chief previews the upcoming visit of Italy’s leader to the White House, where her stance on China will be a topic of discussion with President Joe Biden. Additionally, we delve into the European Central Bank’s desire to maintain secrecy and ambiguity.
A Strong Bond
Ever since Italian Prime Minister Giorgia Meloni took office last year, she and US President Joe Biden have formed a strong relationship. A memorable image of them walking hand-in-hand at the G7 summit in Hiroshima exemplifies their connection. Today, Meloni is visiting the White House to discuss various geopolitical matters, including Italy’s delicate relationship with China.
Context: Italy has been a long-standing ally of the US through NATO. However, Washington was concerned when Rome joined China’s controversial Belt and Road Initiative in 2019. Meloni must decide by the end of this year whether to extend the deal or formally withdraw, risking Beijing’s ire. Although Meloni has publicly evaluated her options, Italian officials suggest she plans to withdraw strategically to minimize retaliation from China.
During her visit, Meloni is expected to discuss her plan for Italy’s withdrawal from the program with Biden. This is crucial as the US seeks reassurance on Italy’s position regarding China ahead of Italy assuming the G7 presidency in 2024. “The Americans want to ensure that Italy is aligned with their stance on China,” said a senior Italian official. “The question is, will Italy be able to use strong language against China if needed during its G7 presidency? Or are the Chinese still capable of influencing Italy?”
Beyond China, the leaders will also discuss the conflict in Ukraine, where they share the view that supporting Kyiv in its fight against Russia is essential. Meloni will likely call for increased US engagement with Africa, recognizing socio-economic development as vital to global security and curbing the flow of migrants to Italy and Europe. “We need a new approach to Africa,” stated the Italian official. “We cannot let Africans see us as former colonial powers, while considering China and Russia as the new players aiding them.”
Chart of the Day: Inflation Remains High
Next week, the eurozone will release its July inflation data. Despite a potential decrease from June’s 5.5% figure, inflation still has a considerable distance to go before reaching the European Central Bank’s target of 2%. The ECB does not anticipate reaching this target until 2025. Rising wages and resilient demand for services are further concerns that could sustain higher inflation.
Keeping Investors Guessing
Investors are constantly speculating about future events, and Christine Lagarde understands this. When the ECB president announces the latest interest rate increases today, she is likely to leave the possibility of further raises open, even if the process is approaching its end.
Context: Over the past year, the ECB has raised rates by an unprecedented 4 percentage points to combat soaring inflation. It has signaled a potential quarter-point increase after today’s meeting. However, doubts persist about the extent to which borrowing costs will rise.
Recent survey data indicates a deepening downturn in the eurozone economy, suggesting that the ECB’s tighter monetary policy is effective and that inflation could decline further. Economists believe that the ECB will maintain uncertainty about the end of rate hikes to prevent investors from speculating on cuts in borrowing costs. Such cuts would loosen financial conditions and risk a resurgence of inflation.
While Barclays’ chief European economist Silvia Ardagna thinks this month’s rate hike will be the last, she also asserts that leaving the door open to potential future increases would be prudent. Lagarde hinted at this strategy last month, stating that it is “unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached.” Senior economist Martin Wolburg from Generali Investments Europe agrees that keeping investors in the dark is the right approach. He said, “By maintaining a hawkish communication, they just let the expectation effect work even after the soon-to-be-reached peak rate level.”
What to Watch Today:
– St Petersburg hosts the second Russia-Africa summit and economic forum.
– EU health ministers meet in Las Palmas, Spain.
Now Read These:
– Stay up to date with the latest developments surrounding Brexit and the UK economy by subscribing to our newsletter.
– Get informed about the changing landscape of international trade and globalization with our Trade Secrets newsletter.
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