Italian business urges quick resolution of post-election impasse

March 11, 2018

Italy’s business leaders, grappling with the outcome of inconclusive national elections, are urging moderation and a quick demonstration of political stability, fearing a surge in support for populists could undermine market confidence in the country’s ability to service its vast debt.

Italy last week delivered an upset to the centrist political establishment, handing big gains to the Five Star Movement and the anti-immigrant League. But both Five Star and the rightwing coalition including the League fell short of the majority needed to build a government.

While market reaction was muted, for Italy’s business leaders the emergence of populist forces untested in power and with Eurosceptic views has brought back concerns about stability that have lain dormant since the European sovereign debt crisis, when Italian debt yields spiked as investors took fright.

Italy’s debt relative to its gross domestic product remains at more than 130 per cent — the largest in the eurozone after Greece.

“A new government needs to avoid any reference to an exit from the euro, because any suggestion risks putting the country at risk vis-à-vis international financial markets,” says Carlo Messina, chief executive of Intesa Sanpaolo, Italy’s largest bank. “Beyond that, the public debt needs to be dealt and job creation.”

Marco Tronchetti Provera, chief executive of Pirelli, said: “Any leader will be careful to avoid the Troika coming to our country” — a reference to the role of international authorities involved in policing Greece’s economic crisis.

“Eight years of Greece in continuous crisis has taught us a lesson that cannot be forgotten. Dreams are fascinating but real life has to be built day-by-day, with vision, but also realistically,” Mr Tronchetti Provera says.

We have never had a situation where we have a parliament made up 50 per cent of populists, and debt amounting to 131.5 per cent of GDP. My fear is that markets will move before there is a government

Italy’s vote came against a backdrop of recovery from a devastating triple-dip recession and a banking crisis that shattered confidence. A coalition led by the League and Five Star is widely considered to be a “disaster” for Italian business — but few expect that to happen.

Instead, expectations among Milan’s elite remain high that Italy’s president Sergio Mattarella, who plays a crucial role in post-election talks, will put in place a broad coalition including moderate establishment voices or even a technocratic government.

Mr Mattarella on Thursday called for the need for a government of “responsibility”, which some executives read as shorthand for a cross-party coalition to keep reforms on track.

“What I would hope for — and I don’t really care where it comes from — is that Italy keeps going down the path of structural reforms. We have asked for these for years but very little was done,” says Rodolfo De Benedetti, chairman of the industrial holding CIR Group, which owns Italy’s national daily La Repubblica.

One veteran Italian banker argues there is only a 10 per cent chance that Mr Mattarella will hand government over to Five Star’s leader, Luigi Di Maio, or Matteo Salvini of the League.

That said, Italy’s business establishment cannot ignore that voters’ rejection of former prime minister Matteo Renzi has been a repudiation of the elite. Mr Renzi’s centre-left won in central Milan, the hub of corporate Italy — but in the poor south Five Star dominated while the rest of the north voted heavily for the League.

“The message of the vote is clear. The cosy world of Italy’s establishment is finished!” say one exasperated former senior executive of an Italian blue-chip. “They need to understand it’s over!”

Executives are taking solace from Italy’s having had a period of almost five years of relatively stable government, during which reforms to jobs and pensions were made — and hoping that as a result the country will get a grace period from international markets for a few months of instability.

“I am not stressed by it taking six months time to form a government. We have seen Germany and Spain take months. Belgium took years. But by the end of the year we need to be in another stable government,” says Andrea Guerra, executive chairman of food emporium Eataly and a former adviser to Mr Renzi on industry.

Privately executives fear that political instability, and anti-EU rhetoric by the League or Five Star, means Italy would risk being “left off the table” in Europe where Germany and France are pushing for greater integration.

Bankers say corporate dealmaking will take a hit, with executives waiting to understand the implications of having Mr Salvini and Mr Di Maio closer to power. Both have talked of renationalisation of former state industries and banks.

Others are taking comfort from Italy’s institutions, the Treasury and the Bank of Italy, which have traditionally formed a bulwark against political upheaval. Nonetheless, several business leaders pointed out that the standing of both institutions was undermined by Italy’s banking crisis — another reason for the populist surge.

But most of all, business leaders are drawing confidence from the historic resilience of Italy’s corporate fabric.

“We have faced Red Brigades, the Cold War at home, mafia, bureaucracy, anti-capitalist movement, even Berlusconi jokes, and survived,” says Luigi Consiglio, a food industry executive. “After this Italian entrepreneurs are strong and capable of facing any difficulty, even political uncertainty.”

However a senior executive muses that Italy’s problem may be that “we always say we will adjust to everything”.

“But we have never had a situation where we have a parliament made up 50 per cent of populists, and debt amounting to 131.5 per cent of GDP. My fear is that markets will move before there is a government,” he says.

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