How Italy is looking more like France

The pandemic has prompted governments to take a more active role in managing their economies. Politicians are giving out generous loan guarantees and subsidising wages to reduce the risk of a wave of bankruptcies and mass unemployment. The next step is taking over companies directly.

After a spree of recent acquisitions — from payment systems to airlines — Italy appears to be headed in this direction already.

It’s a troubling prospect. 

For much of the past three decades, Italy had shifted decisively away from the command economy model that dominated the country after the late 1930s. Under Mario Draghi’s stewardship, Italy’s treasury embarked on one of the largest privatisation programmes in Western Europe, encompassing everything from banks to utilities. Public spending still accounted for 48.7% of GDP last year. But from left to right, successive governments tried to introduce structural reforms and open up to private investment.

The present coalition government of the left-of-centre Democratic Party and the populist Five Star Movement has put a stop to all that. Last week it unveiled the new board of Alitalia, the chronically unprofitable airline, and will spend €3bn nationalising it. Meanwhile, Cassa Depositi e Prestiti (CDP), Itay’s state lender, has acquired a 7.3% stake in Euronext as part of the latter’s takeover of exchange operator Borsa Italiana.

Similarly, the CDP has become the top investor of Nexi following the digital-payment company’s purchase of SIA.

The CDP is also involved in the negotiations to strip the billionaire Benetton family of its controlling share in motorway operator Autostrade per l’Italia, after the 2018 collapse of Genoa’s Morandi Bridge. The state lender is also investing in a string of smaller companies, and stewarding efforts to create a single Italian broadband network.

This sharp change in direction is only partly a response to the pandemic. Prime Minister Giuseppe Conte’s economic adviser is University College professor Mariana Mazzucato, a long-time supporter of government intervention. Five Star has advocated the nationalisation of banks, utilities and other public infrastructure since its creation in 2009. The Democrats have followed suit, abandoning the reformist instincts of former party leader Matteo Renzi.

Italy’s record on state intervention is mixed, at best. After the Great Depression, the Fascist regime created the Institute for Industrial Reconstruction (IRI), which dominated the post-war economy. Some economists credit IRI with prompting Italy’s remarkable catch-up during the 1950s and 1960s — while others believe this was a natural consequence of post-war reconstruction and the transition from an agricultural economy.

In the 1980s, many state-owned enterprises became bastions of inefficiency and privilege, leading to privatisation.

Rome hopes its new round of nationalisations, allied with new EU pandemic funds, will spur public investment after a decade of contraction. It believes a long-term investor such as the state or the CDP will force companies to pursue broader objectives such as fighting climate change, rather than simply rewarding shareholders.

Unfortunately, pursuing efficiency while keeping a government happy is often incompatible. For example, the state is almost certain to resist calls to cut jobs at Alitalia, even if that’s needed for an effective turnaround. If Italy’s motorway network is nationalised, the government and the CDP will find it hard to increase tolls, an important source of funds for maintenance work. More generally, foreign investors may get the impression that they need to team up with a state-controlled entity if they’re to pour money into Italy. That’s not an attractive vision.

Neither is the lack of independence in running these enterprises. the CDP is struggling to keep its distance from Italy’s politicians as they demand its involvement in more and more companies. The coalition has stuffed loyalists onto the boards of state-owned entities such as defence group Leonardo and oil giant Eni.

Italy isn’t alone in the shift towards big government. France has never really moved away from dirigisme. But even Britain’s Conservatives, the champions of free markets, are abandoning Thatcherism to hold onto the support of working-class Brexit voters in the north of England. Running an ever-growing state with ever-growing public debt will be an enormous challenge after the pandemic. One hopes politicians realise the full implications.

Bloomberg