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explainer

Will Italy leave the European Union

Following a decrease of 0.1% in the third quarter of 2018, Italy’s economy contracted of 0.2% in the final quarter of the same year. As such, Italy is now officially in technical recession; just when it seemed to be recovering from the effects of the debt crisis. This has sparked an intense political debate and has cast doubts over its economic prospects. But what does this actually mean for Italy and the EU?

Technical recession: the domestic debate

The news that Italy has entered into technical recession have immediately triggered a mutual-blaming quarrel between political forces. The governing coalition formed by the Five Star Movement and the League attributed the fault to the former ruler, the Democratic Party; who, on its part, accuses the economic policies of the current executive.

In reality, the situation is way more complex, and the responsibility cannot be ascribed to a single reason. As in all economic issues, there are multiple factors in place whose interplay determines the growth on a given period; therefore, it is difficult to clearly find out who or what is responsible. Economic performance is a long-term issue. Amazon’s CEO Jeff Bezos once said that “if we have a good quarter it’s because of the work we did three, four, and five years ago. It’s not because we did a good job this quarter”. His sentence does also apply to states. So, part of the responsibility can be imputed to the previous governments who, in spite of having managed to reassure the markets and bring Italy back on the path to a limited growth, failed to reduce the country’s huge debt. But it is equally true that the current executive, in power since June 2018, has raised the concerns of investors with the economic policies it has implemented or proposed.

First, it attempted to adopt an expansionary fiscal policy to boost growth by increasing public expenditures. However, this alarmed the EU Commission: even though Italy’s budgetary plan did not break the Union’s rules, it was still considered too risky as it would have caused a fiscal deficit and increased the already enormous public debt. This resulted in a standoff that was ultimately solved when the Italian government partially backed down and reduced the planned spending. Yet, the episode caused stress on the financial markets and harmed trust among investors. Another controversial topic in the economic policy of the incumbent government is the introduction of a basic income for unemployed people: it would increase public spending, but its future benefits are dubious.

Technical recession: the external factors

Apart from the policies of this government or the previous ones, there are many other external factors that the executive cannot control and that probably have had a more important impact on Italy’s economic performance. The country’s GDP contractions comes amid a global slowdown. The growth of the EU as a whole has been limited to 0.3% in the final quarter of 2018. There are some issues on trade as well. China, the world’s second-largest economy and a non-negligible export destination for Italy, is also growing at a slower pace than before. Problems exist also with another and more important trading partner: the United States. President Trump’s protectionist policies have surely had a negative impact on the EU and on Italy. At the end of May 2018 the US imposed 25% tariffs on steel and 10% ones on aluminium. In 2016, Italian metal exports to the US were worth almost 2 billion dollars. This is not an impressive figure, but more important industries could soon be hit and this eventuality could have had an impact. Trump is threatening to put tariffs on cars, that always in 2016 represented 9.5% of total Italian exports to America for a total value of more than four billion dollars. Again, this is not an extraordinary amount, but the spill-over effects on related industries should also be considered. The EU is trying to reach a deal on trade with the Trump administration, also by menacing to impose counter-tariffs wort 23 billion dollars on US products, but in case it fails Italy will surely be negatively affected. The looming possibility of a no-deal Brexit in recent months might also have had a role. The UK is a more important destination for Italian export than China and the US, and the prospect of a no-deal scenario may have had an impact, even though it is still too early to evaluate this. But the most important point probably concerns energy supplies. Italy is dependent on petroleum imports, and the price of oil surged in 2018 to reach the climax at the beginning of October, thus covering much of the period in which the Italian economy has contracted. The price went down since then, and the effects will probably be felt in the coming months.

These are only some of the numerous factors that may have determined Italy’s recession in the second half of 2018. What is important to understand is that the issue is very complex and easy explanations are not effective indicators of the reasons behind the GDP contraction. But what about the future prospects for Italy? Will it leave the Eurozone?

A prelude to leaving the Euro?

Since the debt crisis of 2011 and the subsequent austerity policies, Euroscepticism has become common in Italy’s political discourse. EU institutions were criticized and perceived as technocrats at the service of financial interests, and some even advocated for Italy to abandon the EU or at least the Euro. The most recent recession, albeit marginal by now, might reopen the debate, especially if it were to continue. After all, the two ruling parties were among the most vocal anti-Euro political forces, even though they took more moderate positions later on.

This is a political choice that Italy will have to make, but it will have of course major economic implications. According to the optimum currency area theory, it is economically beneficial to have a single currency in case the region is strongly integrated by intense trade exchanges and a great mobility of production factors. So, a country evaluating whether to enter or leave a common currency area should assess its degree of economic integration with other participants. As a matter of fact, the higher the level of integration, the greater are the benefit and the lowest are the costs of renouncing to monetary sovereignty to have a single currency. For what concerns the benefits, the main advantage of a common currency is to eliminate transaction costs due to exchange and interest rates and their variation. If the economies are closely intertwined with an elevated trade volume and a strong mobility of workers and productive factors, having different currencies brings very high costs that partly eliminate the gains of trade; and adopting a single currency removes these costs. But having a common currency also brings its own costs, because it makes it impossible for states to use monetary policy to counter asymmetric economic shocks, namely recessions that hit only that country but not others. If it has its own currency whose value can freely float, its automatic depreciation will boost export and counter the economic slowdown. But if it has renounced to its monetary sovereignty by adopting a common currency like the Euro, this mechanism is impossible. However, a high degree of economic integration minimizes this inconvenience, as it also allows to reduce the recession’s effects. If the country’s economy is closely intertwined with that of its fellow partners, the diminution of the price of its products will encourage others to buy them, thus increasing its exports. Similarly, if there is a high mobility of workers, then jobless people will be able to emigrate to other countries thus re-equilibrating the domestic labour market. In short, if the economies are strongly integrated, the benefits of having a single currency are high and the costs are low; so, it is wise to adopt the common currency. Now, is it the case of Italy?

For what concerns trade, in 2016 Italy’s exports to Eurozone alone was worth 192 billion dollars, over a total amounting to 450 billion. In the same year, its imports from other Eurozone countries amounted to 207 billion on a total of 397. This shows the importance of its exchanges with the other countries using the Euro. Moreover, its economy is also integrated with the Eurozone via mutual investments, expats, joint-ventures, services and others. If it abandoned the Euro, then it would lose all the advantages of having the same currency as its main economic partners. In addition, if it came back to the lira it would have to face the short-term shock. The currency would rapidly depreciate, and while it is true that this would boost export, it would also bring back consistent transaction costs. Moreover, inflation would erode the people’s purchasing power and there would be deep consequences on its debt with soaring spread and strong difficulties to obtain new loans. The situation would surely stabilize with time, but all in all, this does not seem to be an economically-convenient move for Italy.

Conclusion

The fact that Italy has entered in technical recession is surely no good news for it and the EU. Blaming each other at the political level will not solve the issue, also because there are many factors at play and responsibility cannot be fully attributed to anyone. Much will depend on future economic developments; but the contraction is limited by now and, in spite of the Eurosceptic positions of the current government, there is nothing that indicates that Italy will leave the Eurozone anytime soon.

Israel’s Enigmatic relationship with India

India and Israel have been allies for much of recent history although the relations between these two countries have been low-profile and only started getting global attention in recent years. Besides having strong economic ties the two countries also share key strategic and military cooperation.

Surprisingly India-Israel relations were largely informal until 1991. Despite having some ties since the 1960s mainly owing to defence and intelligence cooperation, India did not formalise diplomatic relations due to having a pro-Arab and pro-Palestinian stance. However this gradually changed when they formally established diplomatic relations with Israel in 1992.[1]

History

India recognised Israel as early as 1950, but did not establish diplomatic ties until 1992. During the Suez crisis in 1956 the then Israeli foreign minister Moshe Sharett visited India as the Israeli army pushed into Egypt after Egyptian President Gamam Abdel Nasser nationalised the canal; while India played the role of mediator alongside the UK, the US and Yugoslavia.

During the Sino-Indian war in 1962, Indian PM Jawaharlal Nehru sought arms from Israel, writing to Israeli PM Ben Gurion, and he responded, forming the foundations for defense cooperation between the two countries. This paved way for increased bilateral cooperation over the years as India sought more arms in their war with Pakistan in 1965 as well as in 1971.[2]

Throughout much of the 1970 and 1980s, India kept its distance from Israel publicly due to its support for the Palestinian cause. India was a founding member of the Non Aligned Movement (NAM) that was supportive of anti-colonial struggles around the world which explains their support for the Palestine Liberation Organisation (PLO).[3] India was astonishingly one of the first non-Arab states to recognise Palestinian independence. There were several geopolitical issues that shaped India’s standpoint during the 1970s and 80s. The seemingly antagonist position between India and Israel also involved India’s diplomatic strategy of trying to counter Pakistan’s influence in the Arab world as well as of safeguarding its oil supplies from the Gulf.

There were other major motives behind India’s anti-Israel stance. India has a large Muslim population and their antagonism towards Israel played a major role in delaying diplomatic relations, as politicians feared that they may lose Muslim votes in key regions if they were to formalise ties.[4] Also,  was the fact that thousands of Indian citizens worked in the Gulf, helping keep its foreign exchange reserves afloat.

Security cooperation

Even before establishing formal ties, India and Israel managed to collaborate in specific areas, with India’s main intelligence agency RAW (research and analysis wing) and Israel’s Mossad having signed a secret cooperation agreement in the areas of security, intelligence and military equipment.[5] The two top intelligence agencies established relationships since the 1960s. This was remarkable because throughout the 1970s and 80s their bilateral relations were sour. The situation started to shift in 1989 as three major developments sowed the seeds of change: first, the beginning of the era of coalition politics in India; second, the beginning of Pakistan-sponsored insurgency in Kashmir; and finally, break-up of the Soviet Union and end of the Cold War coupled with the fall-out from the reversal of Iraq’s invasion of Kuwait.[6] Since the early 1990s, the growing insurgent activities in Kashmir sponsored by Pakistan heightened regional security environment of India and the then opposition party BJP kept pressurising the government to normalise relations with Israel. After the end of the Cold War, India, like many other countries had to make major changes to their foreign policy to accommodate the changing international milieu. It went towards economic liberalisation, opening its doors to other nations and subsequently formalised diplomatic relations with Israel. It was however kept low-profile due to India’s interests in the Middle East.

India gave a number of reasons to justify the 1992 opening of formal relations, which are as follows[7]:

  1. Israel’s criticality to what happens in West Asia and the Gulf, that is a part of India’s extended neighbourhood impacting its strategic space, energy supplies and the 6 million Indians living in the region.
  2. Sophisticated defence equipment , technology and systems from Israel; potential cooperation in security and defence including counter terrorism.
  3. Absence of any quid pro quo from the Arab states
  4. Agricultural prowess including related technologies of Israel.

More recently the economic rivalry between India and China plays a role in this context. The growing relations between China and Pakistan have raised insecurities, especially the fact that Pakistan are the largest recipient of Chinese arms. These issues gave India more reasons to build-up their own arms and as Israel are among the top arms manufacturers in the world with one of the best research and development facilities as well as a supposedly good counter-terrorism unit, there are more reasons to increase cooperation in the field of security and defence.

First Israeli PM visit to India[8]

Ariel Sharon was the first Israeli PM to visit India in 2003 and the bilateral relations between the two nations started gaining publicity. State visits from officials started to take place since the establishment of diplomatic relations. This laid the framework for further cooperation in various areas; Agreements on Cooperation in the field of Health Sciences and Medicine and on Cooperation in combating illicit trafficking and abuse of narcotic drugs and psychotic substances were signed in 2003. In the same year, more significant agreements were signed in the field of protection of the environment, and another on the exemption of Visa requirements of holders of diplomatic, official and service passports.

2005 saw a MoU on India-Israeli Research and Development Fund Initiative while in 2006 a major pact was signed in the field of agriculture cooperation.

 Bilateral trade

Bilateral trade progressed rapidly since 1992. From a base of USD 200 million in 1992 comprising primarily of diamonds, merchandise trade has diversified and the overall figure stood at an astonishing USD 5.19 billion in 2011. In 2016 the figure slumped to USD 4.16 billion in 2016 (excluding defence) with the balance of trade in Israel’s favour. Trade in diamonds constitutes over 53 percent of bilateral trade. After China and Hong Kong, India is Israel’s thirds largest trading partner in Asia. Currently the sectors forming the diversified bilateral trade include pharmaceuticals, agriculture, IT and telecom, and homeland security. India’s major exports to Israel include precious stones and metals, chemical products, textiles and textile articles, while major exports from Israel include precious stones and metals, chemicals and mineral products, base metals and machinery and transport equipment.

Cooperation between the two nations increased dramatically ever since the election of India’s new Hindu nationalist BJP government led by Narendra Modi in 2014. This was followed by a first ever visit by an Israeli defence minister in 2015. The current prime ministers Benjamin Netanyahu of Israel and Modi of India met for the first time at a UN General Assembly in 2014 where they discussed economic, technological, and agricultural collaboration for the future, while Netanyahu expressed his concerns about a nuclear Iran and the spread of radical Islam throughout Middle East.[9] In 2017, Modi made a stand alone visit to Israel- the first ever by an Indian PM.

Just weeks before modi’s historic visit, Netanyahu’s cabined agreed on measures aimed at increasing Israel’s non-diamond exports to India by 25 percent while establishing a new 40 million USD joint innovation, research and development fund. In July this year Israel Aerospace Industries (IAI) signed an agreement with India’s KSU in July 2018, to operate Israeli Taxibot semi-robotic vehicles at India’s New Delhi and Mumbai airports. Taxibot is connected to planes which taxi the airplanes from the airport’s jet bridge without the use of the airplane’s main engines.[10]

Israel in recent years have taken a strategic decision aimed at strengthening economic relations with China, Japan and India. Major Indian software companies including TCS, Infosys, Tech Mahindra and Wipro have began to penetrate the Israeli market. During PM Modi’s visit in July 2017, the first meeting of the newly established India-Israel CEOs Forum took place.[11]

Defence cooperation: military equipment and technology

Defence cooperation forms one of the strongest aspects of the bilateral relations

India is the largest buyer of Israeli military equipment, while Israel is India’s largest customer after Russia.[12]

Israel produces some of the most sophisticated, cutting edge weapons systems in the world and India have been major buyers for a while now. India buys weapons systems for their armed forces, including navy and air force.

Since the 1990s, India purchased UAVs, drones, airborne early warning and control (AEW&C) radar systems, anti-tank missiles and many more weapons systems in deals worth billions of dollars. In 2007, the two nations signed a 2.5 billion DSD deal to develop an anti-aircraft weapons systems in India, and in 2009[13], Israel sold Barak 8 air defence systems to India for a staggering 1.1 billion USD. In 2011 Indian army bought more than 1000 units of Israeli X-95 assault rifle to use in counterinsurgency operation. In 2011 there were reports of a deal in which India were to purchase a large number of Israeli Spike anti-tank missiles, launchers, and related equipment worth nearly a billion dollars, from Israel’s Rafael Advanced Defense Systems;[14]. Although the old contract with Rafael was cancelled, India has recently been on the verge of signing a 500 million USD deal with Israel to buy 4500 Spike missiles in a government-to-government purchase which could be finalised any moment.[15]

Israel also provides India with military technologies, and strategies for count-terrorism, including offering assistance following the 2008 Mumbai attacks.[16]

 Shifting Israel-Palestine stance

In 2015, India abstained from voting against Israel at the UN human rights commission signalling a shift in its Israel-Palestine policy. However in 2017 it voted for an Arab-sponsored resolution that rejected the US recognition of Jerusalem as capital of Israel.

 Conclusion

Despite a recent setback taking place due to India having voted against the US recognition of Jerusalem as the capital of Israel, the bilateral relations between the two nations have been growing stronger since the arrival of Modi making way for a new era of collaboration. In early 2018, Saudi Arabia opened its airspace for the first time ever to a commercial flight to Israel with the inauguration of an Air India route between New Delhi and Jerusalem.[17]

It seems today that the history of advocacy for the Palestinian cause is gradually diminishing as India is growing in alliance with Israel in more areas of cooperation and assistance. While India racks up more arms deals and equips its military with more sophisticated weapons systems and technology, it will be interesting to see further developments especially in the field of defence and security cooperation and find out what their main objectives are.

 [1] http://www.atimes.com/india-israel-relations-obscurity-certainty/

[2] https://www.livemint.com/Politics/k4CBHr4bIzoZ0O6OBOXw1M/India-Israel-ties-A-timeline.html ; https://www.tau.ac.il/humanities/abraham/india-israel.pdf

[3] http://www.rubincenter.org/meria/2004/12/pant.pdf

[4] Aafreedi, Navras (2012). “The Impact of Domestic Politics on India’s Attitudes towards Israel and Jews”. In Singh, Priya; Susmita, Bhattacharya. Perspectives on West Asia: The Evolving Geopolitical Discourses. Shipra Publications. pp. 171–183. ISBN 9788175416376.

[5] Pant, Harsh V. 2004a. ‘India–Israel Partnership: Convergence and Constraints’, Middle East Review of International Affairs (MERIA), vol. 8, no. 4

[6] https://www.tau.ac.il/humanities/abraham/india-israel.pdf

[7] https://www.tau.ac.il/humanities/abraham/india-israel.pdf

[8] https://www.tau.ac.il/humanities/abraham/india-israel.pdf

[9] https://www.jewishvirtuallibrary.org/history-and-overview-of-india-israel-relations

[10] https://www.jewishvirtuallibrary.org/history-and-overview-of-india-israel-relations

[11] https://www.mea.gov.in/Portal/ForeignRelation/Unclassified_Bilateral_briefb.pdf

[12] https://www.reuters.com/article/us-airshow-india-israel/israeli-defense-minister-lands-at-india-airshow-to-boost-arms-sales-idUSKBN0LM0WL20150218

[13] “IAI signs $2.5 billion deal with India – Israel Business, Ynetnews”. Ynetnews.com.

[14] https://en.globes.co.il/en/article-1000633160 ; https://www.thehindubusinessline.com/news/world/india-to-buy-israelis-spike-missile-for-1-b/article9749112.ece

[15] https://www.hindustantimes.com/india-news/india-set-to-seal-500mn-deal-with-israel-to-buy-4-500-spike-missiles/story-wdT2IufrQ4ldybZFX76X5K.html

[16] Horovitz, David; Matthew Wagner (27 November 2008). “10 hostages reportedly freed from Mumbai Chabad House”. The Jerusalem Post.

[17] https://www.independent.co.uk/news/world/middle-east/saudi-arabia-israel-airspace-riyadh-tel-aviv-flight-air-india-iran-flight-times-airlines-a8269891.html

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