The pandemic has prompted governments to take a more active role in managing their economies. Politicians are giving out generous loan guarantees and subsidizing 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 privatization programs in western Europe, encompassing everything from banks to utilities. Public spending still accounted for 48.7% of gross domestic product 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-center 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 3 billion euros ($3.5 billion) nationalizing the company.
Meanwhile, Cassa Depositi e Prestiti SpA, 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, CDP has become the top investor of Nexi SpA following the digital-payment company’s purchase of SIA SpA.
CDP is also involved in the negotiations to strip the billionaire Benetton family of its controlling share in motorway operator Autostrade per l’Italia SpA, 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 nationalization 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, which dominated the post-war economy. Some economists credit IRI with prompting Italy’s remarkable catchup during the 1950s and 1960s — while others believe this was a natural consequence of postwar reconstruction and the transition from an agricultural economy. In the 1980s, many state-owned companies became bastions of inefficiency and privilege, leading to privatization.
Rome hopes its new round of nationalizations, allied with new EU pandemic funds, will spur public investment after a decade of contraction. It believes having a long-term investor like the state or 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 nationalized, the government and 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. 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 defense group Leonardo SpA and oil giant ENI SpA.
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 realize the implications.
Bloomberg
