Will Rome waste its EU coronavirus relief funds on ill-advised renationalisation projects?

Will Rome waste its EU coronavirus relief funds on ill-advised renationalisation projects?

It was inevitable that the coronavirus pandemic would provoke a political shift, as well as some drastic measures to stave off economic pain, in hard-hit Italy. The virus is continuing to hammer Italy’s economy, with the pandemic’s second wave squashing hopes for a quick recovery and Rome now predicting a 9% GDP drop in 2020. Hopes are turning to the €209 billion in EU coronavirus recovery cash earmarked for Italy, a larger share than any other member state. Former Italian Prime Minister Enrico Letta even recently referred to the funds as “the last chance” to turn around the country’s economy—if the money is well spent.

Given some of the Conte administration’s recent moves, it’s extremely unclear whether the massive injection of cash will be appropriately allocated. In the run-up to the recent local elections, the Italian government banked on a return to big government, tightening the screws on companies across the country and mounting plans to renationalize a number of major assets.

Conte’s latest, and most troubling, project has been a no-holds-barred attempt to take over Autostrade per l’Italia, the country’s motorway system which was privatized in the late 1990s and is currently controlled by holding company Atlantia. In order to try and build public support for the takeover, Italy’s ruling Five Star Movement has leveraged lingering anger over the tragedy which struck Genoa in August 2018, when the Morandi Bridge—operated by Autostrade—collapsed and killed 43 people.

The bridge collapse was most likely a symptom of Italy’s broader infrastructural problems. As a matter of fact, while Rome has tried to use the Genoa disaster to demonise private highway management, six out of the seven other Italian bridges which have collapsed since 2013 were operated by a company controlled by the Italian government—the very company which Conte’s administration is hoping to replace Autostrade with.

The most concerning part of Rome’s attempts to renationalize its motorways has been the sheer lengths to which the government has been willing to go in order to wrest control of its road system from Atlantia. In a move that has alarmed investors and watchdogs for the rule of law alike, Italy pushed through the controversial Milleproroghe decree last December, which unilaterally modified the rules for motorway concessions in Italy—notably by altering the way that motorway operators were compensated in case their contracts were revoked.

The rationale behind the decree wasn’t very subtle. Before the legislation, the Italian state would have had to fork over €20 billion to buy out Autostrade. After Milleproroghe, this sum sank to roughly €7 billion. Conte may find, however, that the €13 billion he managed to shave off of the fee to renationalise Italy’s motorways is not worth the significant reputational costs which the aggressive move has entailed. Analysts have warned that the way in which Rome has handled the motorway dispute has produced “long-lasting consequences on doing business in Italy” and could make investors so skittish that they begin demanding discounts for holding Italian assets given the government’s arbitrary regulatory changes. As one business strategy professor cautioned, “the risk is that we scare off foreign investors at a time when we need them most”.

In addition to the danger that investors’ faith in Italy’s regulatory stability will be irrevocably shaken, the heavy-handed bid for Autostrade carries serious legal exposure as well. Atlantia has brought the matter before the European Commission, arguing that the Milleproroghe decree breaches EU law and “utterly undermines regulatory predictability”; several of Atlantia’s shareholders have filed additional complaints accusing Rome of expropriating their property in violation of European legal principles. Given that Italy’s own attorney general warned the government in February that revoking Atlantia’s concession was unlikely to stand up in front of scrutiny by the European Court of Justice, the spectre of an extended legal battle looms large.

If the Atlantia saga is the most troubling of Conte’s forays into big government thanks to its knock-on consequences, it’s not the only dubious decision. Rome may have felt that it had no choice but to take over ailing flag carrier Alitalia earlier this year. Long considered a point of national pride, Alitalia’s bankruptcy would have been a bitter pill to swallow for the Italian government.

The airline’s woes, however, significantly predate the coronavirus pandemic which has seen the bottom fall out of demand. Since its 1946 founding, Alitalia has only posted a profit in a single year—1998. The perpetually loss-making carrier has limped along on the taxpayers’ dime, receiving bailout after bailout to the tune of €7 billion. Industry insiders have been brutally honest about Alitalia’s chances of ever turning a profit—one Switzerland-based aviation analyst opined: “The sooner we lose airlines like Alitalia, the better we will be. Alitalia is like Lazarus with a double heart bypass. It’s dead but won’t lie down.”

It’s not clear that the airline’s new owner, the Italian government, is bringing any new ideas to the table that might reverse the carrier’s fortunes. Rome has pledged to spend at least €3 billion on shoring up Alitalia, but it’s unclear whether this will be enough to stop the airline from becoming a bottomless pit swallowing Italy’s badly-needed cash. It’s also unclear whether or not such a major cash injection will fall afoul of European Commission state aid rules. Competitor airline Ryanair has already complained to the EU about the nationalization of Alitalia, and while the Commission recently approved a €200 million grant for the airline, it’s likely that Brussels’ patience will wear thin with Italy’s fresh interventionist streak.

Plenty of ink has already been spilled contemplating why Italy is adopting an interventionist business policy that’s dredged up uncomfortable memories of the IRI industrial policy championed by Benito Mussolini. Then, as now, the Italian government prioritized courting disaffected and unemployed voters over encouraging sustainable investment and boosting the country’s competitiveness. With the Italian economy spiraling, will Rome be able to shift gears in time to take advantage of the EU relief funds it’s slated to receive?

 

 

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