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Despite Italian foreign minister Luigi di Maio’s denials, reports are still floating around that the Italian government wants the European Central Bank to write off some of its debt in order to support Rome’s expansionary fiscal policies. The ECB is unlikely to agree, particularly given the increasingly dubious ways in which Rome is burning cash for questionable projects, from propping up perpetually loss-making companies, to pushing for the creation of national champions.
Indeed, under the Conte administration, Italian state lender Cassa Depositi e Prestiti (CDP), founded 170 years ago to finance basic infrastructure like roads and waterworks, has metamorphosed into a €474 billion juggernaut which the Italian government is puppeteering to build national champions in a range of industries. The coronavirus pandemic has only exacerbated this trend, as Italy has taken full advantage of the EU’s relative laxity on fiscal and state aid rules to plough state money into drowning companies and buy up majority stakes in healthy ones. Italy claims that these interventions are necessary to help the economy withstand the coronavirus downturn, but it increasingly appears like the Conte administration is using the pandemic as cover to indulge in its statist dreams – a troubling trend that the ECB would be remiss to encourage.
The great renationalisation of Italy
For three decades, the selling of state assets in Italy – begun as a condition of joining the euro – was an effective way to offset Italian debt. Since 2017, however, Italy has been reversing this trend of selling off state assets, starting from the nationalisation of the flailing bank, Monte Paschi di Siena. The country’s populist-led coalition government capitalised on a variety of events – from the anger generated by the collapse of the Morandi bridge to the disillusionment after Italian heritage brands such as Bulgari and Gucci were snatched up by foreign investors – to increase their interference in the economy, often using CDP as a conduit.
It’s unsurprising, then, that Rome is also exploiting the pandemic to ratchet up its intervention in the free market. The EU recovery funds, expected to be disbursed in summer 2021, will give Italy yet more cash to spend on renationalising firms and bolstering CDP’s stakes in private corporations. Italy has yet to submit its finalised plan to Brussels for how it intends to spend the whopping €209 billion it was granted, the single largest slice of the Recovery Fund pie, and public watchdogs fear that Rome will continue on its lavish spending spree, to the benefit of CDP’s coffers rather than Italian citizens.
State spending spree
The EU’s tailored budget was designed to be directed predominantly at the languishing sectors of aviation, tourism, events and media. Given its track record, the Conte administration is unlikely to use it accordingly. At the government’s urging, the CDP has had a heavy hand in the clinching of numerous majority stakes in firms from Forex Euronext to payment app Nexi. Fabrizio Palermo, the CEO of the state lender, justified the spending spree by explaining that “we decided to rationalise our portfolio but also to sustain the companies in it with a strategy of trying to create champions on one side and continue to develop infrastructure on the other”.
This rationale, however, is increasingly less easy to justify, particularly in the wake of the sovereign fund’s most recent misjudged merger which the state and its fund are aiming to push through – namely the hot-button tie-up of the peninsula’s only two broadband providers Telecom Italia (TIM) and Open Fiber. The CDP is set to sell its 50% stake in Open Fiber to TIM (of which it is also second largest shareholder, with a 9.9% stake) to create a tele-giant. In doing so, instead of fulfilling its original mandate to invest in Italy’s infrastructure, the CDP risks setting the development of Italy’s broadband back by years.
A game of monopoly
The rollout of a super-fast national fibre network is dearly needed in Italy. A monolithic company, however, will be the opposite of a “champion”. When TIM previously held a monopoly, Italy suffered under slow internet at inflated prices. Open Fiber’s entry on the market brought valuable competition and an uptick in the rollout of ultrafast broadband. Throwing in the towel on broadband competition risks slowing the expansion of Italy’s broadband network to a crawl again.
No wonder that consumer groups have published concerns that the merger will be “detrimental for the market, with the ultimate price to be paid by Italian consumers and businesses”, particularly since the vertical integration would ensure TIM maintains directorial control over matters while also acting as a network operator, thus threatening competitors’ market share. The practice of aiding ‘favoured’ companies skews competition and is likely to anger foreign investors in the country, as in the case of Ryanair, who lament the €30 billion in state aid allocated to European flag carrier airlines. Far from heralding in a new era, a renewed monopoly will be a nasty blast from the past.
Time for smarter spending
Rome’s escalating state intervention risks distorting the market and spooking foreign investors just when the economy needs them most. Even Italy’s mammoth share of the coronavirus recovery fund won’t last long if it’s whittled away on propping up loss-making ventures like Alitalia and Monte Paschi di Siena. With pundits predicting that Covid-19 could shrink the Italian economy by 10% this year, other sources of funding will be in short supply – especially given that the ECB is likely too savvy to grant Italy’s hopes of a debt-write off. If Conte really means to “change the face” of his country, he will have to put his money where his mouth is – and not in distorting healthy market competition to the entire country’s detriment.
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