So Much for "Reinventing Italy"

Business is disillusioned by Berlusconi's slow pace of reform

In the runup to Italy's national elections earlier this year, media magnate Silvio Berlusconi promised voters nothing less than "the reinvention of Italy." As the nation's richest businessman, he pledged to speed long-delayed economic reforms to bolster Italy's flagging competitiveness. Fired up by his rousing oratory, some 5,000 business leaders attending a conference in Parma in March gave the candidate a standing ovation.

Five months into Berlusconi's term, Italy's Inc.'s exhilaration has turned to disillusion. In mid-October, business leaders fired off a joint letter to the Prime Minister proclaiming their disappointment over the slow pace of change and publicly blasted "elements in the center-right [government] that are blocking liberalization." Says Andrea Guerra, chief executive of Merloni Elettrodomestici, a $1.4 billion maker of home appliances based in Fabriano: "All the talk leading up to elections is looking like it is just that--talk."

FEEBLE GROWTH. Berlusconi's government insists its commitment to overhaul Italy's economy has not wavered. The threat of a global recession means that major tax cuts, privatization, big-ticket investment projects, and other important measures must be delayed, officials claim. "There isn't a government in the world that privatizes in a bear market. Reforms will be speeded up when the markets improve," says one official at the Economy Ministry, which has already revised its 2001 growth projection down to 2.3%, from 3.1% in August. The International Monetary Fund predicts an even more feeble 1.4%.

Yet business leaders contend the downturn makes it all the more urgent for the government to accelerate reforms, especially measures to make the labor market more flexible and promote competition in key sectors. Many vital changes can be implemented, they insist, without straining the budget. "We need the courage to act. There is no time to waste," says Mario Moretti Polegato, CEO of $214 million shoemaker Geox in Montebelluna.

On the campaign trail, Berlusconi proclaimed himself a champion of Italy's private sector. While in office, however, he has put $11 billion in planned privatizations on ice and failed to take steps to liberalize key sectors. And contrary to campaign promises, he has frozen public investment in infrastructure and research and development at 2001 levels. Officials recently backed a move by state-owned power company Enel to purchase 40% of the country's largest private gas distributor, a move that extends the former monopoly's market dominance. "Italian businesses cannot continue to pay 30% to 40% more for energy, electricity, gas, and telecom services than their European competitors," says Francesco Bellotti, vice-president of Cofindustria, the Italian employers' association.

BLOCKED SALE. Meanwhile, Berlusconi's government reversed a partial privatization approved earlier this year by the outgoing center-left government. On Oct. 31, it blocked the $380 million sale of a 49% stake in RaiWay, a joint venture that manages the TV and radio transmitter-mast network for the state-owned media company RAI, to Houston-based Crown Castle International Corp. on the grounds that the deal was "undervalued." Crown Castle declined to comment.

Berlusconi also has backed away from plans for a major overhaul of Italy's rigid labor code. Laws that make it difficult and costly to lay off workers are partly to blame for the country's low employment levels: Only 53% of the population holds down a job, compared with a European Union average of 63%. Rather than stand up to Italy's militant unions, officials have chosen to concentrate on more modest measures, such as one that would make it easier for companies to hire workers on short-term contracts. "I'm increasingly pessimistic about the chances for change," says Tito Boeri, a labor economics professor at Milan's Bocconi University.

Berlusconi's majority has pushed through a few measures that companies applaud. They include new tax breaks for investments and a temporary tax amnesty to lure companies out from the huge underground economy. But Italy's bosses want more. They say if Berlusconi doesn't deliver on the bottom line by next spring, the confrontation will escalate. That's not much time to salvage his credentials as the businessman out to revamp Italy.

By Gail Edmondson in Rome, with Kate Carlisle and Stephanie Savariaud

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