Italy: Why Business Is Cheering The Left's Winby
Italians usually refer to Romano Prodi, the Bolognese economist turned politician, as "il Professore." Indeed, Prodi's careful way of expressing himself often seems more suited to the university than to the cynical, cutthroat world of Italian politics. During the recent electoral campaign, Prodi was ridiculed by opponents as a stodgy, colorless figure.
But the Prof is now having the last laugh. In a surprise victory, his Olive Tree coalition of former Communists and market-oriented centrists came out on top in the Apr. 21 elections, and Prodi is likely to become Prime Minister in mid-May.
Because the vote didn't produce a hung parliament as many had feared, a Prodi government should be able to ride out the political squalls that have typically swamped weak Italian governments. The betting is that he will be able to move forward on privatization and keep spending under control. He also wants to bring Italy back into Europe's mainstream by negotiating its reentry into the exchange rate mechanism (ERM), which Italy left in 1992. "By Italian standards, the prospects do look good," says Lehman Brothers London-based senior economist Giorgio Radaelli.
LEAPING LIRA. The promise of the first stable government in years has many Italian business executives cheering Prodi. They and the markets like his platform of privatization, fiscal austerity, and pursuit of the tough economic criteria needed for European monetary union. After the vote, the lira leaped 2% against the German mark, while the Milan bourse had one of its biggest one-day rallies on Apr. 22. "We can see rates coming down by 200 basis points in the next year," predicts Dominic Konstam, Southern Europe analyst at Credit Suisse First Boston. Thirty-year government bonds now yield about 10%.
Although Prodi's vanquished center-right rival, Silvio Berlusconi, talked up Reagan-style tax cuts and reduced government, voters focused more on the recycled political hacks and far-right protectionists in his Freedom Alliance. In contrast, Prodi's team looks pragmatic and modern-minded. True, Italy's former Communist Party, renamed the Democratic Party of the Left, will be by far the biggest parliamentary group in Prodi's coalition. But it has more in common these days with European center-left parties such as Tony Blair's British Labor Party than with hard-core Marxist groupings. Walter Veltroni, No.2 in the Olive Tree, is editor of L'Unita, the once feared Communist Party daily paper, but he has long stated an ambition to remake the Italian left in the image of the U.S. Democratic Party.
While Prodi served a long stint as head of Italy's mammoth state-run holding company IRI, he isn't considered a die-hard statist. At IRI, he spun off carmaker Alfa Romeo and sold off the two largest state-owned banks. "I was the only one who ever really privatized anything in this country," he boasts.
In fact, Prodi stacks up as markedly pro-business for a European leader. He's seen as a champion of the small and midsize enterprises that are the heart of the economy. He is also close to Italy's industrial dynasts, including the Agnellis of Fiat and Olivetti's Carlo De Benedetti. Abroad, he is friendly with top CEOs, including John F. Welch Jr. at General Electric, Robert Allen at AT&T, and Gerhard Cromme at German steel giant Krupp. Prodi also knows Wall Street, recently serving as an adviser to Goldman, Sachs & Co.
But Prodi will need both political and financial savvy to slash deficits enough to qualify for European monetary union. Top priority will go to jump-starting Italy's privatization program. The first target, he says, will be state-controlled telecom giant Stet.
One big doubt is whether Prodi can handle the far left. The hard-line Communist Reconstruction Party, which supported the Olive Tree in the campaign, opposes privatization and is pushing for a restoration of the wage indexation that did so much to entrench high inflation in the 1970s. Still, on key economic issues Prodi can probably counter the leftists through support from the regionalist Northern League and individual members of the center-right opposition.
Another negative is that Prodi has never held elective office. But if he can handle government affairs as well as he ran his campaign, he may be able to push Italy back near the center of European decision-making. Being the world's fifth-largest economy should gain Italy such stature, if Prodi can minimize the chaotic politics that has so often diminished its role.