`Dr. Subtle' Is Ready For Emergency Surgery

In Italy, they call him "Dr. Subtle." Giuliano Amato is noted for his cool and clever demeanor and attention to details. Now more than ever, the Columbia University-trained lawyer needs such attributes. In mid-June, he became Italy's Prime Minister, inheriting one of the country's worst financial crises in recent history. Italy is a mess: Its central bank has been spending $100 million a day to halt a speculative run on the lira, while Milan's stock exchange--once Europe's frothiest--is in the throes of a Tokyo-style collapse, dropping 15% since early June.

In just a few days on the job, Amato has already performed some tricky surgery on Western Europe's sickest economy. He pushed through a $26 billion emergency budget package on July 10, designed to get Italy's crippled state finances through to the end of the year. Meanwhile, his Cabinet is proposing radical overhauls of Italy's gold-plated civil service, pension, and health care systems. Says the 54-year-old Amato: "We were on a cliff edge, and we had to act."

IMMEDIATE RESULTS. Now, the new Prime Minister is poised to take Italy through the most profound structural changes since Benito Mussolini put the state in charge of much of Italian banking and industry during the Great Depression. In fact, on July 11, Amato signed sweeping decrees restructuring huge government companies, setting them up for sell-offs by yearend. Included are such industrial behemoths as IRI, the industrial and financial holding company, and the giant energy group ENI.

Previous Italian governments have promised large privatization programs, with nothing to show. But this time, says Stefano Micossi, chief economist of Confindustria, the Italian employers' federation, "they've already done in one day what other governments never could do."

Amato has been able to act quickly because the traditional political parties that have governed Italy since 1946 have never been so weak. Trounced by voters in general elections last April, they are being battered by corruption probes of unprecedented scale. Scores of politicians have been arrested or placed under investigation, including former Foreign Minister Gianni De Michelis.

Amato plans a drastic reduction in political influence at IRI, ENI, and other state companies. Hazy lines of government control have long allowed state industry to become vast spoils machines for political parties, who systematically placed cronies in top management. Amato has now placed the companies under direct control of the Treasury, considered the cleanest and most technically competent branch of the government. And, for the first time in half a century, ENI and IRI will be subject to corporate legal rules making them more accountable to shareholders and the public.

There's more to come. By the end of July, Amato promises to restructure all state groups into two "super holding companies"--a move he hopes will help simplify the government sell-off. To help retire debt, ENI and IRI managements will be given freedom to sell their own subsidiaries, such as oil and gas producer Agip or engineering giant Finmeccanica. By yearend, Amato wants to raise $3.5 billion through the sale of convertible bonds in government companies.

The measures come none too soon. With less than six months to go before the single market comes into effect, Italy is Europe's biggest headache. Rome alone carries over one-third of all European public debt, while Italy's numbing $160 billion budget deficit this year has forced the Bundesbank and Bank of France into costly lira rescue operations. Such a situation prompted European Finance Ministers last May to urge Rome to get its economy in order.

Few groups want economic change more than business. Italian growth was white-hot throughout the 1980s. But in January, 1990, Italian exporters were made much less competitive when Rome ignored high inflation and decided to anchor the lira to the stronger currencies of Northern Europe. High labor costs and an overvalued lira caused profits to slump at such blue-chip companies as Fiat, Pirelli, and Olivetti. At the same time, lean foreign companies raced in to grab Italian market share. "Our margins last year were one-third of what they were in 1988," explains Olivetti Chairman Carlo De Benedetti.

INDUSTRIAL EXODUS. To survive, many companies eked out productivity gains through slimming down work forces and, in an increasing number of cases, moving production out of Italy. Benetton, the clothing giant with $2 billion in sales last year, has shifted some key production lines to low-labor-cost countries such as Turkey, Egypt, and India.

Rome's gamble is that swift action to reduce government spending can ease pressure on the lira and bring down punishing real interest rates of 10%. Mne easy way out would be a lira devaluation of perhaps 15% to 20%. Many top bankers and industrialists now see that as unavoidable later in the year, although opposition in Europe would be fierce. Amato would rather avoid a devalution, aides say.

The real question, then, is whether Italy can endure the terrific pain associated with cleaning up its act and joining Europe. The Bank of Italy, for example, estimates that meeting the economic criteria laid down by the Maastricht summit last December would require an austerity program that could throw an additional 600,000 people on the dole. But, says Andea Bollino, chief economist at ENI, "if we do nothing, then we'll have a collapse and 3 million unemployed." That's why many in Italy pray that Dr. Subtle's surgery works.

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